World Bank Documentdocuments.worldbank.org/curated/en/... · world, China in the north, and India...

February 2018

NEPALSystematic Country DiagnosticA new approach for a federal Nepal

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TABLE OF CONTENTS

Abbreviations ii

Preface iii

PartA MotivatingaDifferentApproach 1 1.IntroducingNepal 2 2.Nepal’srecentdevelopment:surprisingprogressgivenlowgrowthandpersistentinequity 3 3.Whyisadifferentapproachneeded? 6

PartB ElementsofaNewApproach 8 Sixareasforaction 9 1.ImprovingpoliticalinstitutionsinafederalNepal 11 2.CreatingmoreandbetterjobsforallNepalese 14 3.ProductiveandsustainablelivelihoodsfromNepal’sland,forests,andwater 17 4.Equitableinvestmentsanduseofhumancapital 20 5.Strengtheningresiliencetonaturaldisastersandhealthshocks 23 6.Gettingmorefrominternationalmigrationandremittances 25

SummaryofPriorities 27

Notes 29

References 32

NEPAL Systematic Country Diagnostic ii

ABBREVIATIONS

FCHVs femalecommunityhealthvolunteers

FDI foreigndirectinvestment

GDP grossdomesticproduct

GLOF glaciallakeoutburstflood

ICOR IncrementalCapital-OutputRatio

NEA NepalElectricityAuthority

SCD SystematicCountryDiagnostic

SMEs smallandmedium-sizedenterprises

SMS ShortMessageService

SOEs state-ownedenterprises

NEPAL Systematic Country Diagnostic

ThisSystematicCountryDiagnostic(SCD)examinesthekeyconstraintstoandopportunitiesforacceleratingpovertyreductionandenhancingsharedprosperityinNepal.TheSCDbuildsonabroadbodyofanalyticalworkconductedinNepal,butparticularlyonthreeWorldBankreportspublishedin2017:“MovinguptheLadder:PovertyReductioninNepal,”“ClimbingHigher:TowardaMiddle-IncomeNepal,”andthe“NepalRiskandResilienceAssessment.”ItalsobuildsonevidencecompiledinsixworkinggroupsandconsultationsandsurveysinallsevenNepaleseprovinceswithcivilsocietyorganizations,theprivatesector,government,developmentpartners,andcitizens.

Thereportwaspreparedasthefirst“Agile”SCD,whichmeantconsideringtheobjectivesoftheSCDupfrontanddesigningaprocesstoefficientlyandeffectivelyachievethosegoals.InadditiontoinformingthenextCountryPartnershipFramework(theprimaryobjectiveofallSCDs),twofurtherobjectiveswerehighlighted:aligningtheWorldBankGrouparoundacommonunderstandingoftheconstraintsandopportunitiestoprogress,andcontributingtothepublicdebateinNepalonkeydevelopmentchallenges.Clearcommunicationisessentialtoachievingtheseobjectives,andthustheteamfocusedondevelopingashort,self-containedreportthatcaneasilybereadbyawideaudience.ThismeanstheSCDisastrategicassessmentratherthanasummaryoftheevidence,andfurtherresourcesarereferencedthroughout.Asupplementalannexprovidesadditionalevidence(foundonlineathttp://wrld.bg/q3Ew30iIbKs).

Broad-basedconsultationswereessentialforbuildingthelegitimacyoftheSCD,andprovincialconsultations,anonlinesurvey,andanSMSsurvey(withmorethan200,000responses)wereconductedtogarnerinputsfromaswideabaseaspossible.ThisinformedthediagnosticandgroundeditintherealitiesoflifeinNepal.TherewerealsoseveralinnovationsandadjustmentsmadetotheinternalprocessesofdraftingtheSCDtoincreasetheefficiencyandqualityofengagement.Forexample,(a)theconceptnotewaspreparedasapresentationtofocusdiscussionontheframeworkbeingproposed;(b)workinggroupsonkeydevelopmentchallengeswereusedtosolicitcountryteaminputs,buildconsensus,anddevelopownership;and(c)morestructurewasprovidedfortheinternalWorldBankGroupreviewprocesstoencouragemorefocusedreviews.

PREFACE

iii

6 NEPAL Systematic Country Diagnostic

ThereportwaspreparedbyateamledbyDamirCosic,RafaelDominguez,RuthHill,andAshishNarain.PetalJeanHackettandPersephoneEconomoucontributedfromMIGA.Theextendedteamislistedbelowandmanyothersinthecountryteamcontributedbyattendingtheregionalconsultationsandsharingtheirobservations.RajibUpadhyaandRichaBhattarailedthedevelopmentoftheconsultationssupportedbyGayatriPathak.TheteamgratefullyacknowledgestheguidanceofAnnetteDixon,MengistuAlemayehu,QimiaoFan,MartinRama,WendyWerner,BenuBidani,ManuelaFrancisco,TakuyaKamata,SereenJuma,ChristianEigen-Zucchi,TekabeBelay,SanjaySrivastava,VolkerTreichel,AmbarNarayan,DhushyanthRaju,SaileshTiwari,TrangNguyen,BigyanPradan,JohnIkeda,andJuriOkainpreparingthereport.ThepeerreviewerswereLuis-FelipeLopezCalva,JohannesHoogeveen,MasudCader,andSebastianEckardt.AdministrativesupportwasprovidedbyIgorKecmanandSunitaYadav.

TheextendedteamincludedPurnaChhetri(Agriculture);MohanAryalandMayaSherpa(Education);RabinShresthaandBipulSingh(EnergyandExtractives);AndreaKutter(Environment);SabinShresthaandIliasSkamnelos(FinanceandMarkets);FranckBessetteandVikramMenon(Governance);ManavBhattaraiandKariHurt(Health,NutritionandPopulation);RoshanBajracharyaandSudyumnaDahal(MacroFiscalManagement);HirokiUematsu(PovertyandEquity);AnastasiyaDenisova,JyotiPandey,JasmineRajbhandary,MaheshworShrestha,ThomasWalker,andIanWalker(SocialProtectionandJobs);MatiasDappeandDiepHoutte(TransportandICT);KamranAkbar,HemangKarelia,YoonheeKim,LuizaNora,andJunZeng(Social,Urban,RuralandResilience);SilvaShresthaandAhmedShawky(Water);RadhikaSrinivasanandPaulBance(Fragility,ConflictandViolenceCCSA);HelenMartin(PublicPrivatePartnershipsCCSA);andJagjeetSareen(ClimateChangeCCSA).

iv

NEPAL Systematic Country Diagnostic 1

PART A

Motivating a Different Approach


fewareaswhereanyethnicgrouporcastehasamajority.Nepaliscomprisedofthreeagroecologicalzones:theTarai(southernplains),theHills,andtheMountains.AbouthalfofNepal’s28.5millionpeopleliveintheTarai,whichisthebreadbasketofthenation.EconomicactivityisconcentratedaroundKathmanduandtheTarai.1However,powerhashistoricallybeenconcentratedinthehandsofasmallnumberofhigh-casteHindufamiliesfromtheHills.

4.Nepal’srecenthistoryismarkedbyasuccessionoffeudalregimesandunderinvestmentinphysicalandhumancapital.Afterdecadesofrivalrybetweenthemedievalkingdoms,modern-dayNepalwasunifiedin1768andledbyaseriesofhereditaryleadersfortwocenturies.However,until1951,therewasnomodernadministrationandlittlepubliceducation,whichresultedinverylowlevelsofphysicalandhumancapital.Illiteracyratesexceeded90percent.2Nepalexperimentedwithdemocracyinthe1950s,whichwasendedbyaroyalcoup.Aparty-lesssystemknownasPanchayatwasputinplaceuntilapeaceful“PeoplesMovement”in1990,whichbroughtindemocraticreforms,elections,andanewconstitution.Fromthemid-1990suntil2006,thecountrywasinthethroesofaMaoistinsurgency.Apeacetreatywassignedin2006andelectionswereheldtwoyearslater.

5.Followingtheendofconflict,Nepalhaswitnessedalengthypoliticaltransition,asthecountryembarkedona10-yearprocessofdraftinganewconstitution.Duringthisperiod,thecountrywentfrommonarchismtoafederalrepublic,with20primeministersandasmanygovernments.Thecontestedpoliticaltransitionhasbeenmarkedbyanabsenceofpoliticalleadership,replacedinsteadbyrotatingownershipofpoliticalappointmentsbythreemajorpoliticalpartiesandempowermentofabureaucraticelite.ThetransitiontofederalismthatiscurrentlybeingimplementedmarksasubstantialshiftinthelocusofpowerfromaKathmandu-centricbureaucracyto7provincesand753localgovernments.ThisisaresponsetotheinabilityofthecentralgovernmenttodeliverthetypeofinclusivesocialcontractandprogressthatNepal’scitizensdesire.

1.Nepalisalow-incomecountry,butisrichinnaturalendowments.Nepal’spercapitawateravailabilityandforestcoverismorethantwicetheSouthAsiaaverage.However,Nepal’snaturalendowmentsalsomakedevelopmentchallenging.Thetopographylimitsdomesticconnectivity,anditisexposedtofloods,landslides,anddrought.TheHimalayanmountainsareanareaofintenseseismicactivitythatresultsfromthetectoniccollisionoftheIndianandEurasianplates,makingNepalthe11thmostearthquake-pronecountryintheworld.Nepalispredominantlyanagrarianeconomy;67percentoftheworkforceisengagedinagriculture,whichaccountsfor33percentofvalueadded,onaverage.AlthoughNepal’seconomichistorywasintradeandtheindustriesthatgrewuparoundtrade,theindustrialbaseissmall(12percentofvalueadded)anddeclining.

2.NepalisarelativelyclosedeconomybutisuniquelyconnectedtoIndiaanditspaceofeconomicdevelopment.AlthoughNepalislandlocked,itislocatedbetweentwoofthefastest-growingeconomiesintheworld,Chinainthenorth,andIndiaintheeast,west,andthesouth.IndiaisNepal’slargesttradingpartner,accountingfor65percentofNepal’stotaltrade,andtheprincipaltransitroute,withmorethan85percentofallimportsenteringthroughIndiairrespectiveoftheircountryoforigin.NepalandIndiashare1,750kilometersofopenborder,whichmeansthat,inadditiontoformaltrade,thereisaconsiderablevolumeofunrecordedtradeingoods,exchangeoflabor,remittancesand,consequently,aclosecorrelationofinflation.TheNepaleserupeeispeggedtotheIndianrupee,givingthecentralbanklimitedscopetoundertakeindependentmonetarypolicy.Nepal’srelationshipwithChinaislessdeveloped,giventhephysicalbarriertheHimalayaspresentalongtheborder,buttherelationshipisdeepening.However,despitethelargeanddynamicmarketsonitsborder,Nepal’sexport-importratioisquitesmallandithasoneofthelowestratesofforeigndirectinvestment(FDI)intheworldandentrybarrierstomanysectors.

3.Nepal’spopulationisethnicallydiverse.NepalisamajorityHinducountrywithsignificantethnicdiversity;123mother-tonguelanguageswererecordedinthe2011Census.Itismixedgeographically,with

1. Introducing Nepal

Part A Motivating a Different Approach


employment.Theservicesectoraccountedforhalfoftotalgrowthsuchthatitnowcompriseshalfofgrossvalueadded.Theservicessectorislargelyinformalandisdominatedbywholesaleandretailtrade,withtransportandcommunications,education,andrealestatesectorsbeingthefastest-growingsubsectors.Industrycontributedonly0.5percentagepointsoftotalgrowth,anddeclinedto12percentoftotalvalueadded,inpartasguaranteedquotasforexportofgarmentsandcarpetstolucrativeU.S.marketscametoanend.Onthedemandside,consumptionwasadominantdriver,contributing3.3percentagepointstoaveragegrowth.Publicinvestmenthasbeenlow(table1),resultinginslowpubliccapitalaccumulation.Ofgreatconcern,productivitygrowthwasbroadlyflatanddidnotcontributetogrowththroughthisperiod.6

8.Nepalalsorecordedstrongprogressonsharedprosperity,despitepersistentinequalityofopportunity.From2004to2011,consumptionamongthebottom40percentgrewalmosttwiceasfastasconsumptionamongthetop60percent.ThismakesNepaloneofthebestperformersgloballyonsharedprosperity.Yetthiswasalsoaperiodinwhichhistoricpatternsofspatialandsocio-economicexclusioncontinuedtolimittheopportunitiesofdisadvantagedgroups,asexemplifiedinadultliteracyratesthatarealmosttwiceashighin

6.Strongprogresshasbeenmadeoverthelasttwodecadesonreducingpovertyandboostingsharedprosperity.TheproportionofNepalesehouseholdslivinginpovertyasmeasuredbytheinternationalextremepovertylinefellfrom46percentin1996to15percentin2011(figure1).3Asimilarlyimpressiveimprovementinwell-beingisobservedwhenthenationalpovertylineisconsidered—thenationalpovertyratewas25percentin2011—andgainsinotherdimensionsofwelfarearealsoevident.4Althoughthereisapaucityofofficialdataonwell-beingtrendsandotherbasicstatisticssince2011(seedataannex),estimatesundertakenbytheCentralBureauofStatisticsandtheWorldBanksuggestpovertycontinuedtofalluntil2015(datacollectedpriortotheearthquakeandsubsequenttradeblockade).

7.Incontrast,NepalexperiencedlowGDPgrowthwithminimalproductivitygrowthoverthelast20years.Nepal’sgrowthwasmuchlowerthanthatoftheothereconomiesintheregionduringthelast20years(figure1),growingatanaveragerateof4percentannually.5Onthesupplyside,thelargeagriculturalsectorhasperformedpoorly,accountingforonly1.3percentagepointsofgrowth.Thesectornowproducesonlyone-thirdoftotalvalueadded,althoughremainsthelargestemployer,accountingfor67percentoftotal


2. Nepal’s recent development: surprising progress given low growth and persistent inequity

Figure1:Arapidpaceofpovertyreductioncoupledwithslowgrowthinapost-conflictsociety

Note:TheNepal1996and2004povertyratesareadjustedtomakethemcomparabletothe2011rate,whichusedaconsumptionaggregatebasedon7-dayrecall(1996and2004useda30-dayrecall).Withoutthisadjustment,thepaceofpovertyreductionwouldappearmorerapid,asa30-dayrecallresultsinahigherpovertyratethana7-dayrecall.PPP=purchasingpowerparity.

(PovertyheadcountrateusingUS$1.90line,2011PPP) (GDPgrowth,Index,1990=100)

Source:Povcalnet(April2017). Source:WorldDevelopmentIndicators.

BangladeshIndia

South AsiaSri Lanka

Nepal

BangladeshIndiaSouth AsiaNepal

500

400

300

200

100

0

1990 1995 2000 2005 2010 2015

50

40

30

20

10

0

1990 1995 2000 2005 2010 2015


higherlaborforceparticipationamonghouseholdswithoutamigrant.Estimatesonlaborforceparticipationinhouseholdswithmigrantsvary,butoverallsuggestlowerlaborforceparticipationasaresultofmigration.9Remittancesalsoenabledincreasedinvestmentsinhealthandeducation,particularlyfemaleeducation.10

10.SendingamaleadulttoworkabroadhasbeenanoptimalstrategyformanyNepalesehouseholds,butithasnotbeenwithoutcost.First,thetypeofmigrationpredominatinginNepalistemporaryworkforyoungmenoutsideofthecountry,withworkersreturningaftercompletingsomeyearsabroad.Muchofsocialanddomesticlifegetsputonholdastheseyoungmentakeonmultiplemigrantstints,andthesocialcostofthiswasrepeatedlyremarkeduponduringtheregionalSCDconsultations.Workingandlivingconditionsformigrantsareoftenhard,andsomemigrantworkersdiewhileabroad.11Second,asNepalhasexportedworkers,thecostof


Kathmanduvalleyasinthemid-Westernmountains[i],andbasicschoolingcompletionratesthatarefourtimeshigheramongBrahmansthanDalits(figure2).

9.Rapidlyincreasingratesofinternationalmigrationhelpexplainstrongandequitableimprovementsinwelfare.Officiallyrecordedremittancesincreasedfrom2percentofGDPin2001to30percentin2015,oneofthehighestsharesintheworld(figure3).Remittanceswerereceivedbypoorandnonpoorhouseholdsalike,withhalfofhouseholdsatallpointsintheconsumptiondistributionreportingthereceiptofremittancesby2011.Remittancesdirectlyaccountedfor27percentofallpovertyreductionfrom1996to2011,andhighratesofmigrationalsohadindirectimpactsonpoverty—oneestimatehasthetotalimpactofmigrationtotheGulfcountriesat40percent.7Migrationledtorealwageincreases,particularlyinagriculturalwagesandnonfarmwagesforwomen.8Theserealwagegainshaveresultedin

FY13 FY14 FY15 FY16 FY17(e) FY18(f) FY19(f) FY20(f)Realeconomy (percentagechange,unlessotherwisestated)NominalGDP,currentprices(NPR,billion) 1,695 1,965 2,130 2,247 2,599 2,884 3,240 3,613RealGDPgrowth(atmarketprices) 4.1 6.0 3.3 0.4 7.5 4.6 4.5 4.2

Consumerprices(periodaverage) 9.9 9.0 7.2 9.9 4.5 5.5 6.5 7.5

Fiscalsector (aspercentageofGDP,unlessotherwiseindicated)Totalrevenueandgrants 19.5 20.6 20.8 23.2 26.1 26.6 26.7 27.0Expenditures 19.0 20.0 21.9 23.7 29.3 30.9 31.3 31.5Fiscalbalance(includingon-lending) 0.5 0.6 -1.1 -0.4 -3.3 -4.3 -4.6 -4.6Totalpublicdebt 32.2 28.2 25.6 28.0 27.6 29.4 31.0 32.6Monetarysector (percentagechange,unlessotherwiseindicated)Broadmoney 16.4 19.1 19.9 19.5 15.5 …. …. ….Domesticcredit 17.2 12.7 15.6 18.1 20.2 …. …. ….Privatesectorcredit 20.2 18.3 19.4 23.2 18.0 …. …. ….Balanceofpayments (aspercentageofGDP,unlessotherwiseindicated)Currentaccountbalance 3.4 4.6 5.1 6.2 -0.4 -2.0 -2.8 -3.2Exportsofgoodsandservices 10.7 11.5 11.6 9.5 9.2 9.8 9.7 9.6Importsofgoodsandservices 37.5 40.8 41.5 39.4 43.6 43.9 44.0 44.2Remittances(aspercentageofGDP) 25.6 27.7 29.0 29.6 26.8 26.3 26.5 26.6Grossreserves(inmonthsofimports) 7.9 8.4 10.1 10.9 9.8 8.6 7.3 6.0MemorandumitemsPopulation,million 28.0 28.3 28.7 29.0 … … … …GDPpercapita,US$current 689 706 747 729 … … … …Source: NepalRastraBank,MinistryofFinanceandCentralBureauofStatisticsforactuals,WBstaffforestimatesandforecasts.Note:e=estimate;f=forecast;…=notavailable.

Table1:Selectedmacroeconomicindicators


HealthVolunteers(FCHVs)wereanimportantpartoftheexpansionintheprovisionofpreventivehealthservices.Privatespendingonhealthandeducationishigh,bothforservicesprovidedinpublicfacilities(forexample,payingfordrugsinpublichealthfacilitiesoradditionalfeeschargedbycommunityschools)andforprivateservices.Privateexpenditureaccountsfor55percentoftotalexpenditureineducationand60percentoftotalexpenditureinhealth,makingprivatecontributionstohealthandeducationsomeofthehighestintheworld.15Community-basedgroupssuchasfarmer-managedirrigationsystemsandforestusergroupswerealsoimportantinensuringprogressonnaturalresourcemanagement.16

13.Increasedgovernmentspendingonhealthandeducationandsupportivepoliciesinthesesectors(suchassupportofthesystemofFCHVsandcommunity-managedschools)alsocontributedtoprogressoneducationandhealthoutcomes.Spendingoneducationandhealthwasmaintainedduringadecadeofconflict,andspendingonbothsectors,particularlyhealth,increasedafter2006.17Thesepositivepolicieswereencouragedbystrongdonorinvolvementinthesesectors.Thisspendingalloweduserfeestoberemovedorlowered,whichalsohelpedincreaseaccesstobasicservices.18Still,governmentspendingonhealthandeducationremainsmuchbelowthatofpeercountries.19

exportingothergoodshasincreased.Thegainsinrealwages,whichhavebeengoodforthewelfareofpoorruralhouseholds,haveraisedtherelativecostofproductioninNepal.Remittanceshavealsoledtoanappreciationoftherealexchangerateandmadecontinuedrelianceonimporttariffstogenerategovernmentrevenuefeasible(sectionB.2).11.Inadditiontomigrationandremittances,otherfactorshavealsoaidedNepal’sprogressonpovertyreductionandsharedprosperity.Consensusonmacroeconomicpoliciesamongpoliticalparties,albeitinformal,resultedinmacroeconomicstabilityanddecliningdebtratios.Highglobalfoodpricesattheendofthe2000swereanimportantdriverofruralincomegrowth:78percentofagriculturalincomegrowthwasdrivenbyincreasedprices.Smallerhouseholdsizesandlowerdependencyratioswerealsoanimportantcontributortopovertyreduction12;Nepal’sfertilityratenearlyhalvedfrom5.1in1991to2.6in2011.12.Stronglocalcommunitiesandprivatedemandforhealthandeducationincreasedaccesstobasicservicesandallowedservicedeliverytobemaintainedduringyearsofconflict.Forexample,theprimaryenrollmentrateincreasedfrom66percentin1999to97percentin2016,13and85percentofprimaryenrollmentisincommunityschoolsthatreceivefundingcentrally,butarelocallymanaged.14FemaleCommunity


Figure2:Nepalisatopperformerinsharedprosperityinthepresenceofinequalityofopportunity

Source:StaffcalculationsusingPovcalnet. Source:WorldBank2017b.

BasicSchoolingCompletionRate(percent)

HillBrahman 42.3

TaraiBrahman/Chhetri 45

Newari 36.4

Others 35.3

HillChhetri 24.9

TaraiOtherCaste 20.7

Mountain/HillJanajati 18.2

TaraiJanajati 16.6

Muslim 10.9

TaraiDalit 9.5

HillDalit 9.2

0 20 504010 30

Congo,D

em.R

ep.(04-12)

China(08-12)

Paraguay(09-14)

Belarus(09-14)

Mongolia(10-14)

SlovakRepublic(07-12)

Bhutan(07-12)

Kazakhstan(08-13)

RussianFederation(07-12)

Bolivia(09-14)

Nicaragua(09-14)

Congo,R

ep.(05-11)

Ecuador(09-14)

Chile(09-13)

Nepal(03-10)

Brazil(09-14)

Georgia(09-14)

Colom

bia(09-14)

Cam

bodia(08-12)

Cam

eroon(07-14)

India(04-11)

Panam

a(09-14)

Turkey(08-13)

Thailand(08-13)

Indonesia(11-14)

Ukraine(09-14)

Peru(09-14)

Uruguay(09-14)

Pakistan(07-13)

Norway(07-12)

Poland(07-12)

Sweden(07-12)

CostaRica(10-14)

LaoPDR(07-12)

Vietnam(10-14)

SriLanka(06-12)

Armenia(09-14)

Rom

ania(07-12)

Tanzaniaf(07-11)

Bulgaria(07-12)

Uganda(09-12)

ElSalvador(09-14)

Moldova(09-14)

Philippines(06-12)

Iraq(07-12)

Finland(07-12)

Mexico(10-14)

Switzerland(07-12)

Mauritius(06-12)

Togo(11-15)

Macedonia,FYR(09-13)

Senegal(05-11)

Belgium

(07-12)

Austria(07-12)

France(07-12)

CzechRepublic(07-12)

Denmark(07-12)

Germany(06-11)

Spain(07-12)

Dom

inicanRepublic(09-13)

Slovenia(07-12)

UnitedStates(07-13)

Argentinae(09-14)

Luxembourg(07-12)

Rwanda(10-13)

Hungary(07-12)

Netherlands(07-12)

KyrgyzRepublic(09-14)

Serbia(08-13)

Lithuania(07-12)

Iran,IslamicRep.(09-13)

Estonia(07-12)

Albania(08-12)

Cyprus(07-12)

Italy(07-12)

Portugal(07-12)

Montenegro(09-14)

UnitedKingdom

(07-12)

Honduras(09-14)

Ireland(07-12)

Latvia(07-12)

Iceland(07-12)

Croatia(09-12)

Greece(07-12)-5

-4-3-2-1012345678910

Nepal(03-10)Bottom40%Growth:7.5%TotalGrowth:4%

Averageannualconsumptiongrowth(percent)


Anexaminationofgrowthratesinabusiness-as-usualscenariohighlightsthatmoreisneeded.Keepingkeyvariables—investmenttoGDP,growthofhumancapital,growthofproductivity—atrecenthistoricalaveragesandcomplementingthemwithUnitedNationspopulationprojections,Nepal’spotentialortrendrateofgrowthwouldslowtoanaverageof3percentperyearfrom2017to2030.Atthatrateofgrowth,percapitaincomewouldreachonlyUS$958in2030.20GiventhatNepalisalow-incomecountry,itneedsfasterratesofgrowth,ontheorderof7to8percent,thanitisachieving.

ii. Sourcesoffragilityremainbecauseofpowerimbalancesandinequalityofopportunity.TheWorldwideGovernanceIndicatorsrankedNepalinthebottom20thpercentileforpoliticalstabilityandabsenceofviolence/terrorism,andinthe23rdpercentileforruleoflaw,outofmorethan200countries.21Adesiretoaddressentrenchedstructuralinequalitiesfueledconflictinthepast.Measuresofinequality,suchastheGiniindexofconsumption,showoverallinequalityinNepaltobelowandstableoverthelongterm—0.33in2011

14.Despitethesuccessfulandrapidreductioninpovertyoverthelasttwodecades,thisSCDarguesthatthereisanurgentneedtochangeNepal’sdevelopmentmodel,forthreemainreasons:

i. Opportunitiesforfastergrowthandpovertyreductionarebeingmissed.Growthratesarelowandaredrivenbyremittance-dependentprivateconsumptionratherthaninvestment.Yetmigrationandremittanceflowsareonadecliningtrend(figure4).Thestructureofemploymenthasremaineddominatedbyagricultureandincreasinglyinformalservices.Higherratesofproductivitygrowthandstructuraltransformationrequireachangeofthegrowthmodelfromonethatreliesonconsumptiontoonethatisfueledbyinvestmentinphysicalcapital.Opportunitiesandfinancingforinvestmentarepresent,butpublicinvestmenthasbeenlowandunabletocrowdinpotentialprivateinvestment.TherateofFDIiscurrentlyoneofthelowestintheworld.Productivitycanalsobehelpedbyreturneemigrants,whocomebackwithexperienceinanewsector,cashintheirpockets,andastrongdesiretobeentrepreneurs.

(percentofGDP)

Source:WDI

Figure3Personalremittancesincreasedrapidlyandwerereceivedbypoorandnonpooralike

100%

50%

0%NLS

S2010/11

9995918783797571676359555147433935312623191511730

100%

50%

0%

NLS

S2003/04

100%

50%

0%

NLS

S1995/96

RemittancesReceivingHouseholds

ConsumptionPercentiles

0

5

10

15

20

25

30

35

201520102005200019951990

BangladeshIndia

South AsiaSri Lanka

Nepal


3. Why is a different approach needed?


society;forexample,only8percentofNepal’slawyersarewomen,lessthan1percentareDalit,andabout80percentareBrahminandChhetris.25

iii.Welfaregainsarevulnerabletonaturaldisastersandotheruninsuredrisks.TheearthquakeinApril2015took9,000livesanddestroyedordamagedassetsworthUS$5.2billion,approximatelyone-quarterofthecountry’sFY2014GDP.26AlthoughmanyhouseholdshaveexitedpovertyinNepal,welfaregainshavenotbeenlargeenoughtomovethemintothemiddleclass,andtheyremainvulnerabletofallingbackintopovertyshouldanuninsuredincomeshockoccur.27Theproportionofhouseholdscountedasvulnerabletopovertyincreasedfrom28percentin1996to45percentin2011.28ThepositionofthesehouseholdsisparticularlyprecariousgivenNepal’shighlevelsofexposuretonaturaldisasters,whichwillincreasewithclimatechange,andthecontinueddependenceonrain-fedagriculture.Healthshocksalsopushmanyintopoverty.29Remittanceincomeisalsovulnerable,asshownbytherecentslowdowninremittancegrowth,andgiventhatmigrantsareconcentratedinIndiaandfouroil-dependentcountries.Asubstantialchangeinthestructureoftheeconomyisneededtoreducevulnerability.

andalmostunchangedsince1996.However,thisreflectsthefactthatNepalisattheearlystagesofdevelopment,andbenefitingfromtheequalizingforceofinternationalremittances,ratherthantheabsenceofstructuralinequalities.Asthe“NepalRiskandResilienceAssessment”22 notes,althoughNepalhasmadesignificantprogressoverthelast10yearsofpeace,seriouschallengesremain.Adesireforrights,equity,andinclusionmotivatesthecurrentmovetofederalismandfeaturesfrequentlyintheconstitution,highlightingtheimportanceofthisagendainNepaltoday.23

Businessasusualwillnotaddresstheseinequalitiesquicklyenough.Thecurrentpoliticalsystemremainshighlycentralizedandexclusionary.Identityhasincreasinglybecomeamobilizingpoliticalforce.Themovetofederalismoffersahistoricopportunitytoreshapethisdynamicifpowerismovedclosertocitizens.However,limitedaccountabilityatthelocallevel,giventheabsenceofelectedrepresentativesfornearlytwodecades,hasoftenallowedextractivepoliticalelitesandpatronagetobepresentatthelocalleveltoo.24Inequalityofopportunityandaccesstopublicservicesalonggender,spatial,andethniclinespersist,despitesubstantialimprovements.Thishasimpactsonmanyaspectsof


Figure4Growthofremittanceshasslowedasdeparturesofmigrantworkershavecontracted

Source:NepalRastraBankandDepartmentofForeignEmployment.

700

600

500

400

300

200

100

0

FY2012

FY2013

FY2014

FY2015

FY2008

FY2009

FY2010

FY2011

FY2016

FY2017

(thousands)

GrowthinRemittances(right)

DeparturesofMigrantWorkers(left)

(percentchange,y/y)70

60

50

40

30

20

10

0


PART B

Elements of a New Approach


investmentisessentialforindividualstobecomemoreproductiveemployeesandentrepreneurs.

iii.Harnessingthepotentialofnaturalresources.Theconstraintstoprivateinvestmentareapparentinnaturalresourcedevelopment,thethirdareaforaction.Nepalisrichinnaturalresources—itsforestcover,wateravailability,andhydropowerpotentialareamongthehighestinSouthAsia—buttheycontributeverylittletoGDPgrowth,reflectingalackofbothpublicandprivateinvestmentinthesector.Forexample,Nepal’seconomicallyviablehydropowerpotentialisestimatedat43,000megawatts,butlessthan2percentofthisiscurrentlyexploited.35Forestscoverabout40percentofNepal’sgeographicareabutNepalimportsbothtimberandfuelwood.WhileprotectionsonthedevelopmentofNepal’snaturalresourcebaseareneeded,thecurrentlowratesofproductivitymeanthatkeyopportunitiesarebeingmissed.Gettingmorefromnaturalresourceswillimproveemploymentforthemanywhoareengagedinthissectorandhavespill-overeffectsintoothersectorsbyincreasingelectricitygenerationandprovidinginputstoothereconomicactivities.

iv.EnsuringallNepaleseareequallyabletoinvestinandusehumancapital.Whilemoreandbetterjobsareessential,individualsneedgoodhealth,skills,andfreedomfromdiscriminationtobeabletobenefitfromtheseopportunities.Increasinghumancapitalincreaseslaborproductivity.Addressingspatialandsocialinequalitiesintheacquisitionanduseofhumancapitalisalsoessentialforincreasingefficiency.Ratesofinternationalmigrationarehigherforgroupsthatarelessfavoredinthedomesticjobmarket.36Inequalityinaccesstojobsreflectsinequalitiesthatarepresentfrombeforebirththatimpacttheacquisitionofhumancapital.InNepal,achild’sgender,location,andparentaleducationplayadominantroleindeterminingwhetherachildiswell-nourished,hascleanwatertodrink,andstartsandfinishesprimaryschoolontime.37Improvinginclusioninacquisitionanduseofhumancapitalisnotonlyimportantfortakingadvantageofopportunitiesforgrowthandpovertyreduction,itisfundamentaltoaddressingsourcesoffragility.38

15.ThisSCDidentifiessixareaswhereactionisrequiredtoallowNepaltotakeadvantageofopportunitiesforgrowthandpovertyreduction,toaddresssourcesoffragility,andtoreducevulnerability:30

i. Encouragingpoliticalinclusionandeliminatingclientelism.Increasingtheinclusivenessofthepoliticalprocessandstrengtheningtheruleoflawisparticularlyimportanttoaddressingthesourcesoffragility.Thecurrenttransitiontofederalismisapotentialgamechangerifitisaccompaniedbyameaningfulchangeinthebalanceofpower.Thismakesthisareaofactiononeinwhichrealprogressisnotonlyimportant,butalsoverypossible.Progressinotherareasalsorequiresacknowledgingtheconstraintsemanatingfromexclusiveandunaccountableinstitutions.Withoutthat,technicalsolutionsmaybeproposedandimplementedbutleadtolittlelastingchangeasexistingpowerstructuresremainintact.Forexample,poorpolicydesignandineffectiveinstitutionsconstrainpublicinvestmentininfrastructure,notlackoffinancingortechnicalknow-how.Andpublicinstitutionsreinforcetheinequalitiesthatpersistinnutrition,health,education,andaccesstogoodjobs.

ii. Promotingprivatesectorinvestmenttocreatemoreandbetterjobs.Thisisessentialtotakingadvantageofopportunitiesforgrowthandpovertyreduction.Nepal’sdomesticlaborforceispredominantlyinlow-returnsectorssuchasagriculture,andtransitionsoutofagriculturehavebeenintosectorssuchasurbanservices,whereproductivityisdeclining.31ThelowproductivityofworkandunderemploymentinNepalmeanindividualsaresubstantiallymoreproductivewhentheymigrate.Lowincomeandlackofdomesticjobsiscitedastheprimaryreasonforseekingforeignemployment.32WhenyouthwhostayinNepalareemployed,theyarelesslikelytoreportbeingsatisfiedwiththeirworkandmorelikelytodesireanewjobthansimilaryouthinBangladesh,Cambodia,andVietnam.33LowerfertilityratesofferthepotentialforNepaltoreapademographicdividendthroughariseintheworking-ageshareofthepopulation,butthisrequiresadequatejobsfornewentrantsintotheworkforce.34Addressingconstraintstoprivate

Part B Elements of a new approach

Six areas for action


toNepalgettingmorefrominternationalmigration.Migrantsoftenreturnwithexperienceworkinginanewsector,cashintheirpocket,andadesiretosetuptheirownbusiness(morethantwo-thirdsofthosewhostayindicatethattheywouldliketobeentrepreneurs).Nepalcannotgainfromthisunlessthebarriersthatconstrainprivateinvestmentareremoved.

17.Whileactioninallidentifiedareasisneeded,theevidencesuggestsaprioritization,asindicatedintable2.Constraintswereprioritizedbasedontheirlikelyimpactoncreatingmoreorbetterjobs,addressingtheunderlyingdriversoffragility,andbuildingresiliency.Theevidencebaseusedwas(a)benchmarkingcriteriathatindicatesNepalisunderperformingcomparedtoasetofstructuralandregionalpeers;40(b)empiricalevidencethatshowsremovingtheconstraintwillaccelerateorsustainprogressonthethreeobjectives;and(c)countryexpertiseprovidedduringextensivecountryconsultationsthatsuggeststheconstraintisbinding.Inaddition,thefeasibilityofaddressingconstraintswasconsidered:challengingconstraintstoaddress,suchasimprovingpublicinstitutions,wereprioritizedonlywhenitwasdeemedthatevenminimalprogresswouldhavealargeimpact.

18.Improvingpublicinstitutionsisconsideredfirst,becauseinefficientandexclusiveinstitutionsconstrainprogressonallfronts,andbecausethetransitiontofederalismpresentsauniqueopportunitythatshouldnotbemissed.Increasing

v. Increasingresiliencetonaturaldisastersandhealthshocks.TooofteninNepal’shistory,progresswassetbackbynaturaldisasters.AlthoughsuchdisastersspotlightthevulnerabilityoflifeinNepal,Nepalesegrapplewithmoremundaneshocks,suchasillhealth,onaregularbasis.Resilienceisbuiltbothbyreducingexposuretoriskandstrengtheningcopingmechanismsforwhenshocksdooccur.

vi.Gettingmorefrommigration.Large-scaleinternationalmigrationwillremainanimportantfactofNepal’sdevelopmenttrajectoryoverthemediumterm.Gettingmorefrommigrationentailsaddressingconstraintsremittancerecipientsandreturnmigrantsfaceinpursuingentrepreneurialinvestments.Inaddition,migrationneedstobemadeassafeandremunerativeaspossible.

16.Theseareasofactionareinterrelated.Lackofinclusiveandaccountablepublicinstitutionsisanareaofaction,butisalsotheunderlyingcauseofconstraintstoprogressintheotherfiveactionareas.Examplesofthisarehighlightedinthefollowingsubsections.39However,findingopportunitiesforpoliticallyfeasibleprogresstoovercometheconstraintsidentifiedinareas2to6wouldhelpNepalgrowandreducepoverty,addressfragility,andreducevulnerability.Inaddition,manyoftheactionsinareas2to4wouldincreaseresilience:increasingmoreformaljobs,investinginhealthandeducation,andsustainablelandmanagementpractices.Likewise,addressingtheconstraintstoprivatesectorinvestmentisessential

Figure5Responsesfromsurveysconductedduringconsultations


Note:F2F=facetoface.

F2F,secondF2F,first Facebook,secondFacebook,first SMS,first

50%

40%

30%

20%

10%

0%Abilityofgovernmenttomakeachange

Lackofjobopportunities

Accesstoeduca-tion,healthcare,and

servicesforall

Usingland,forests,andwaterforbetter

livelihoods

Resiliencetoenvironmentalandhealthshocks

Gainingmorefrommigration

Fromthefollowinglistofchallenges,whatdoyouseeasbeingthebiggestchallengefacingNepaltoday?


identifiedasmostimportanttoNepal’sprogress.Surveyswereconductedwithallparticipantsattheendofface-to-faceconsultationsineachprovince,aswellasonline(advertisedviaFacebook)andviaSMS(advertisedvialocalradiointhepoorest20districtsofNepal).TheSMSsurveyattractedmorethan200,000responses(seetheconsultationsannexforfulldetails).Jobcreationwasbyfarthebiggestpriorityforyounger,lessemployed,lesseducatedrespondentsonFacebookandSMS.Intheface-to-faceconsultations,publicinstitutions,humancapital,andnaturalresourceswereidentifiedasmoreimportant(figure5).

20.Withineachofthesixactionareas,keyconstraintstoprogressinthatareahavebeenidentifiedbasedonevidence,workinggroupsessions,andconsultations.Thefollowingsubsectionsdescribetheseconstraints.

privatesectorinvestmentisessentialtotakingadvantageofthegrowthandpovertyreductionopportunitiesthatNepaliscurrentlymissing.AcquiringandusinghumancapitalalsocontributestogrowthandpovertyreductionandisfundamentaltoaddressingthesourcesoffragilitystillpresentinNepal.Thus,bothissuesaredeemedequallyimportant.Naturalresourcedevelopmentisconsideredfourth,becauseofitsimportantroleincreatingjobsinaspatiallyequitablemannerandcontributingtoincreasedresilience.Additionalactiontoincreaseresilienceagainstshocksandtogetmorefrommigrationarefifthandsixth,becausemuchoftheactionneededintheseareaswillbeaddressedbyactioninotherareas.

19.Surveysundertakenaspartofcountryconsultationssuggestthatthisprioritizationisconsistentwiththechallengesparticipants


Takingadvantageofgrowthopportunities

Addressingdriversoffragility

Reducingvulnerability

Aggregateranking

Improvingpublicinstitutions High High High 1

Increasingprivatesectorinvestmentforjobcreation High Medium Medium 2

Acquiringandusinghumancapital Medium High Medium 2

Naturalresourcedevelopment High Low Medium 3

Resiliencetonaturaldisastersandhealthshocks Low Low High 4

Gettingmorefrommigration High Low Low 5

Table2Rankingofareasforaction

21.Improvingpublicinstitutionsisfundamentaltoprogress,andanareainwhichthereisroomformeaningfulchange.TheWorldBank’sWorld Development Report 2017: Governance and the Law41exploresthereasonswhysomepoliciesworkandothersfail.Policymakingtakesplaceincomplexpoliticalandsocialsettingsinwhichindividualsandgroupswithunequalpowerinteractwithinchangingrulesastheypursueconflictinginterests.Powerisdistributedunequallyineverysocietyandis,inpart,determinedbyhistory.Theunequaldistributionofpowerisnotalwaysharmful,butitmayleadtoharmful

consequencesandunderminethecorefunctionsofinstitutionsifitgivesrisetoexclusion,capture,andclientelism,asithasinNepal.Improvinggovernancecanmitigate,evenovercome,powerdifferences.Changehappensbyshiftingtheincentivesofthosewithpower,reshapingtheir preferences and beliefsinfavorofpositiveoutcomes,andconsideringtheinterestsofpreviouslyexcludedparticipants,therebyincreasingcontestability.FederalismischangingincentivesandcontestabilityinNepalandcouldprovideanopportunityforpositivechange.

This will require an effective transition to federalism that gives power to inclusive, accountable, and capable subnational governments, and increased inclusion and accountability in federal institutions.

1. Improving public institutions in a federal Nepal


25.Nepal’shistoryischaracterizedbyanexclusionaryandKathmandu-centricstate.Twohundredyearsofhereditary,feudalregimesandaparty-lesssystem,whereparticipationinthepoliticalprocesswastheprerogativeoftwohigh-castegroups,49limitedthevoiceofmanycitizens.Thecentralizedstructureofthestate,withsignificantimbalancesinpowerandinfluencebetweenthelargelyKathmandu-basedpoliticalandbureaucraticclasscomparedwiththerestofthecountry,iscentraltothepoliticaleconomyofcorruptionandthecaptureofresourcesbythiseliteclass.Thisculminatedinafirstpeople’smovementin1990followedbyanewconstitutionandtheintroductionofmultipartydemocracy.Theprogressmadeduringthisperiodwasnotsufficienttopreventadecade-longviolentinsurgencythatstartedin1996thathadoriginsinantifeudalideologyandgrievancesduetoexclusion.Inthedecadesincepeace,politicalandpublicinstitutionshavebecomemoreinclusive,buttheinfluenceofhistoricallyexcludedgroupsisstilllimited.Forexample,Dalitscomprised4to7percentofthecentralexecutivecommitteesofthemainpartiesin2012(comparedtotheirpopulationshareof14percent).50Despiteacommitmenttominorityquotas,70percentofcivilservicehiresfrom2007to2014werefromhigh-castegroupsand13percentwerefromhistoricallyexcludedgroups,despitebothcomprisingabout30percentofthepopulation.51Withincastes,hiringisoftenfromfamilieswithmembersthatarealreadycivilservants.52

26.Nepal’sprotractedpoliticaltransitionhashadimplicationsforaccountabilityandtheruleoflaw.Legitimacyhasnotcomefromlegality,butratherfromconsensusamongthemainparties.TheComprehensivePeaceAgreementandtheInterimConstitutionstatethatdisagreementswillbesettledthrough“mutualtalks,understanding,consensusanddialogue.”TheInterimConstitutionexplainsthatpoliticalconsensusmeanstheconsensusreachedbythemainsevenpoliticalpartiespresentinNovember2006.Thishashadtheeffectofputtingpoliticsabovethelaw,whichhashadimplicationsforthewaysocietyfunctions.53Politicalpartiesaredistinguishedlessintermsofpoliciesorideastheyrepresent,andmoreintermsofthepatronagetheybestowwiththeresourcestheycontrol.Atthelocallevel,thepowerofpartyhasfurtherbeenstrengthenedbythelackofaccountabilityresultingfroma20-yeargapinlocalelections.Localelectionsheld


22.ThelasttwodecadeshavebeenturbulentinNepalassocietyseekstoredefinetheverynatureofthecountry.ThecentraltensioninNepal’ssocietywas,andcontinuestobe,betweentherulinggroupsandthosethatcontinuetofeelexcludedandmarginalized.Thepost-conflictperiod(2006–16)hasbeencharacterizedbyintensepoliticalfragmentationandaproliferationofnewactors,withpoliticalpartiessplittingandnewgroupscompetingforspaceonthenationalstage,leadingtoincreasingchallengestoformastableandlong-lastinggoverningcoalition.

23.Duringthistime,Nepal’srankingonkeydimensionsofgovernancehassuffered.42Itrankedinthebottom20thpercentileonruleoflaw,governmenteffectiveness,andpoliticalstability/absenceofviolenceoutofmorethan200countries.Further,itrankedinthe23rdpercentileonregulatoryqualityandcontrolofcorruption.43Exceptforpoliticalstability/absenceofviolenceindicators,Nepalisperformingworsein2016thanitdidin2006onkeymeasuresofgovernance.Onereportstates:“Muchofthegovernmentapparatus,evenincludinganti-corruptionbodies,mightbeviewedasbeingstructuredaroundprovidingfinancialreturnstotheeliteinthepoliticalandbureaucraticclass.”44Therearespecificexamplesofpoliticiansandbureaucratsbenefitingthemselvesandtheirpatronagenetworksthroughtheimplementationofpoliciesandregulations:aminister’shomedistrictreceivedcompensationformorethanthreetimesthenumberofbuildingsdestroyedintheconflict;45politicallyconnectedfirmscircumventtaxesbyhavingthetaxcodechangedandbygovernment-complicitevasion,resultinginincumbentfirmshavinglowerratesoftaxationthanregionalandstructuralpeers;46andthepercentageoffirmsinNepalexpectedtogivegiftstosecuregovernmentcontracts(51percent)ismorethantwicetheregionalaverage.47Asaresultthemajorityofthepublicbelievesthatthemostimportantfactorinwinningprocurementcontractsispersonalconnectionwithgovernmentofficials(88percent)orpoliticalparties(87percent).48

24.TwokeyfacetsofNepalhavecontributedtothecurrentqualityofinstitutions:(a)anexclusionary,centralizedgovernmentpresentthroughoutNepal’shistory;and(b)theprotractedtransitioninwhichtheinfluenceofpoliticalpartiesstrengthenedandaccountabilitydeclined.


facilitatesthedisbursementoffunds,butonly19.2percentofthebudgetisdevolvedtolocalgovernments(lessthanthe50percentthatwasrequestedbynewlyelectedlocalcouncilmembers),andatthetimeofwritingmechanismsforadministeringthefiscaltransfershaveyettobeestablished.ThedeploymentplanforexistingcivilservantstoalltiersofgovernmentisreadybutismeetingresistancefromKathmandu-basedcivilofficers.Althoughfunctionshavebeenallocatedacrossgovernmenttiersandapprovedbythecabinet,thebillthatdefineslocalgovernmentresponsibilitiesiswithparliament.54

30.Federalismalsoposesrisks.Thereisaninherentriskindisruptingthepowerbalanceinsociety,andthiswillneedtobemanaged.Inaddition,federalismmayincreaseimplementationchallengesifresponsibilitiesamongdifferentlevelsofgovernmentsinthenewstructureareunclear,ifadequatefiscalresourcesfordelegatedservicesarenotprovided,orifimplementationcapacityatthenewlycreatedsubnationallevelsisnotbuilt.Thenewresponsibilitiesofplanningandfinancialmanagementinlocalgovernmentsrequirenewskillstoensureservicedeliveryismaintained.Thisisparticularlythecaseinmunicipalitiesthatfacemorecomplexdemandsforserviceprovision,andinpoorer,moreremotelocalgovernmentswherecapacityislikelytobelower.

31.However,morefundamentally,governancechallengeswillstillneedtobeaddressedinanewlyfederalizedNepal.Governancechallengeshavebeenjustaslargeatthelocallevel,wherecapacityislowerthanthecentralgovernment.55Theeducationsectorprovidesanexample.Decentralizationimproveddeliveryofeducationservices,butthesectorhasbeenconsideredoneofthemostpoliticalservicesectorsinNepal,withpoliticalinterferenceinlargeprocurements(suchasthecontributionofschoolbuildings),thehiringofteachers,andthedisbursementofscholarships(seesectionB.3).56Someofthechallengesreflectthelackoflocalelectionsfor20years,butinparttheyalsoreflectthefactthattherisksofcapturearejustaspresentatthelocallevel,andcanbeevenlargerwhenthelocalpolicyarenaislesscontested(WorldBank2017c).Increasinginclusionofexcludedgroupsandthecontestabilityofelectionsandpolicymakingatthelocalandcentrallevelareessentialtofederalismbringingaboutafundamentalchange.57

in2017provideanimportantopportunitytoaddressthelackofaccountabilitythathasbeenpresent.Sixtypercentofthoseelectedwerenewtopolitics,andthisoffersagenuineopportunityforchange.27.ThecurrenttransitiontofederalismprovidesaconsiderableopportunityforincreasinginclusionbydevolvingpoweroutofKathmanduandincreasingaccountability.Thenewconstitution,adoptedin2015,hasdefinedNepalasademocratic,federal,andsecularrepublic,andNepalisembarkingonpotentiallythemostradicalrestructuringofthestateinitshistory.Thepreciseaimofthenewconstitutionistoaddresstheissuesthatledtomarginalizationandexclusion.Federalismisnotconceivedofasdecentralizationofservicedelivery,butasagenuinesharingofpowerbetween753localgovernmentswiththepowertoraiseandmanageresources,7provincialgovernments,andthecenter.Intheory,federalismbringsthegovernmentclosertothepeopleanditcanleadtoamuchmoreinclusiveandaccountableformofgovernment.TheseaspectsmakefederalismparticularlyapplicableinNepal,wheredomesticconnectivityisachallenge,andethnicandlinguisticdiversityishigh.28.Thebenefitsoffederalismarepotentiallyfar-reachingandcouldencouragethespatialexpansionofeconomicactivities.Federalismoffersseveralpotentialbenefitsbeyondincreasinginclusioninthepoliticalprocess.ThecreationofprovinceswiththeirrespectiveseatsofpowershouldspeedupthecreationofurbanagglomerationsoutsideofKathmandu.Competitionamongmoreautonomouslocalgovernmentscouldfosteramoredesirableinvestmentclimate.Moreinclusiveandfairerrepresentationoffersthepotentialtoaddressgeographicandsocialinequitiesinaccesstobasicservices.Federalismcouldalsomaketheutilizationandallocationofinvestmentinnaturalresourcesmoreefficientandsustainable.29.However,thereisstillconsiderableuncertaintyabouthowfederalismwillunfold.Transitionalarrangementsandelectionsareontracktobecompletedbythebeginningof2018,asrequired,butkeyaspectsoftheconstitutionremaincontestedbycertainsegmentsofthepopulation.Whileplansforthedeploymentoffunds,functions,andfunctionariesareunderway,thereismuchthatremainstobedetermined.TheFY2018governmentbudgethasdedicatedbudgetcodeslinkedtolocalgovernmentaccountsand



politicalinstabilityasthebiggestconstrainttoprivatesectorinvestmentandgrowth.59Indeed,firmscitepoliticaluncertaintyasoneofthemajorobstaclestooperations,cuttingacrosslocationandsize(figure6).Politicaluncertaintyisunderstoodtomeanaprotractedpostconflictperiodofconstitutiondraftingandrotatingleadershipamongthethreeparties(alongwiththeregularchangesincivilservicethisimplies).Stronginstitutionscanservetodampentheeffectsofpoliticalinstabilityonpolicydirectionandtheregulatoryenvironment.However,economicinstitutionsremainweakinthecountry.60Theresultisuncertainty,whichdiscouragesinvestment,particularlyforthosewhoarelesswell-connectedandabletonavigateuncertainty.35.Poorinfrastructureisfurtherconstrainingprivateinvestmentandproductivity.Nepalranks130thoutof190countriesintermsofinfrastructureavailability,theworstinSouthAsia.Electricityandroadsareparticularlylargeinfrastructureconstraintscomparedtoregionalandstructuralpeers(figure6).Two-thirdsofNepalesefirmsidentifiedelectricityasamajorconstraint,muchhigherthantheregionalandglobalaverage.Therearefrequentoutages,andfirmsmustrelyonexpensivedieselgeneratorsforupto40percentoftheirelectricityuse.Thisraisescostsandreducescompetitiveness.61Increasinginvestmentinhydropowerwouldaddressthisconstraint,andthisis

33.Raisingproductivityiskeytomoreandbetterjobs,andthissectionlooksatwhatitwilltaketoraiseproductivity.Sectorsinwhichpreviousanalyticalworkshowsthatthecountryhasastrongandunexploitedcomparativeadvantageincludehydropower,tourism,agribusiness,andcement.Increasingproductivityinnatural-resource-basedsectorsisconsideredinmoredepthinsectionB.3.

Politicalinstabilityandweakinstitutionsareidentifiedasthekeyconstraint,discouragingfirminvestment,limitinginfrastructureinvestment,andencouragingpoorgovernanceofmarkets.Inaddition,lackofopennesslimitsthedegreetowhichNepalbenefitsfromthevibrantmarketsonitsborder,andfromglobalmarketsmorebroadly.Finally,accesstocreditremainsunequal,limitingproductivitygrowthforsomefirms.34.Politicalinstabilityandtheweaknessofinstitutionswithinwhichindividuals,firms,andgovernmentsinteractarethebiggestconstraintstobusinessidentifiedbyfirms.Leadershipandgoodgovernancehavebeenacommonfeatureofmostcountriesthathaveexperiencedrapidandsustainedgrowth.Severalcross-countryempiricalstudiesalsofindastatisticallysignificantandinverserelationshipbetweenpoliticalinstabilityandlong-termcapitalaccumulation.58InNepal,too,numerousstudiescarriedoutinrecentyearsinthecountryhaveidentified

forpoliticalleadership,planning,andfinancialmanagementatthelocallevel;andinvestinginincreasedtransparencyandaccountability(suchasthroughpublishingunderstandablebudgetsandplans,andmeasuringandpublishingcomparativeindicatorsonlocalgovernmentperformanceandservicedelivery)areessential.Thereisalsostillaneedtoimprovethepoliticalprocessatthefederallevel,whichrequiresinvestmentsinevidence-baseddecisionmaking,transparency,andinclusion.Thefollowingsectionsdetailingthefivefurtheractionareaswillalsonotewhereimprovinginstitutionsatthefederallevelisparticularlyimportant.

32.Inclusive,accountable,andtransparentsubnationalgovernmentsareessentialtoaddressingNepal’sgovernancechallenges,andtheuncertaintyandriskssurroundingimplementationcannotbetheexcuseforfailure.Thechallengeslistedwouldonlybetheproximatecausesofwhyfederalismmightnotleadtoimproveddevelopmentoutcomes.Goodpoliciesareoftendifficulttointroduceandimplementbecausecertaingroupsinsocietythatgainfromthestatusquomaybepowerfulenoughtoresistthereformsneededtobreakthepoliticalequilibrium.Donorsupporttoprovidethenecessaryfundstosubnationalgovernments;buildingcapacity


This will require investment in infrastructure, the removal of barriers to competition that currently constrain private investment, greater openness to external markets, and more equitable access to finance.

2. Creating more and better jobs for all Nepalese


Figure6Politicaluncertaintyisamajorconstraintandinfrastructuregapsarehigh

SouthAsiaNepal Structuralpeers

Source:EnterpriseSurvey2013andWorldDevelopmentIndicators.

Nepalhaslargeinfrastructuregapsandlowpublicinvestment

1500

1000

500

0Fixedlineandmobilecellularsubscriptions(per1,000people

Electricityconsumption(kilowatthourspercapita)

Totalroadnet-work(kmper100,000people)

Electricpowertransmission

anddistributionlosses(US$lostper1,000US$ofoutput)

1086420

Publicinvestment(%ofGDP)

(percentoffirms)

Small

Medium

Large

0 20 40 60 80 100

48.3 24.5 9.0

51.9 43.9 2.9

75.9 5.5 4.4

PoliticalinstabilityElectricityAccesstofinanceOther

Mainconstrainttofirmoperation

wellasgreaterefficiencyinspending,isrequired. 37.AddressingNepal’sinfrastructuregapwillalsorequireaddressingconstraintstoprivateinvestmentininfrastructure.Theprivatesectorcanbesupportedininvestingininfrastructureiftheprojectcanbefinancedoncommercialtermswhileremainingaffordableandofferingvalueformoney.TherearechallengestoprivateinfrastructureinvestmentinNepalthatneedtobeaddressed.Public-privatepartnershipmodelshavefailedtodeliveronamajorcorridorproject,theFastTrackHighway,despitesixattemptssince1996.66ConstraintstoprivateinfrastructureinvestmentsarediscussedfurtherwithrespecttohydropowerinvestmentsinsectionB.3,andtheInfraSAPdiagnosticwillprovideamorein-depthassessment.38.Inaddition,poorgovernancelimitscompetitionandimpedesprivateinvestmentinsomesectors,includingkeysectorsliketransport.Weakcompetitivestructures,regulatorybarriersthatrestrictentry,andpreventionofinternationalcompetition,haveledtotheprevalenceof“insider”firmsinsomesectorswithlargemarketsharesandcomfortableprofitmargins,andwithlittleinterestingrowingtheirbusinessorbreakingintonewproductareasandmarkets.ThisobstructsthedevelopmentofavibrantanddynamicprivatesectorcapableofgeneratingthekindofgrowthandgoodjobsthatNepalneeds.Smallandmedium-sizedenterprisesfinditdifficulttoenterandsurviveasevidencedbylowratesofentryofnewfirmsandanagingoffirmsovertime.67Largerfirmsandfirmswithalargermarketsharehavelowerrates

discussedinsectionB.3.Giventhecountry’sgeography,mostmovementofgoodsandpeoplehappensbyroad.Poorroadinfrastructurethushasabigimpactbothoncompetitivenessandonthespatialconcentrationofeconomicactivity.Almost40percentofservicesinputstoprocessedfoodexportsaretransportrelated,asare30percentforleatherand25percentforbeveragesandtobaccoexporters.62Notonlyistheroadnetworksmall,itisalsopoorlymaintained.Notsurprisingly,transportisthethird-most-citedtopbusinessenvironmentobstacle. 36.Lowpublicinvestmentrateshaveledtolargeinfrastructuregaps.Despiteamplesavings,investmenthasbeenlowerthancomparators(figure6).GrosspublicinvestmentinNepalhasaveragedlessthan5percentofGDP,belowtheaveragenotonlyofSouthAsia,butalsoofalllow-incomecountries.Notonlyisthelevellow,butpublicinvestmentisinefficient.OnemeasureofthisistheIncrementalCapital-OutputRatio(ICOR),63whichaveraged5.7between2001and2007,thehighestamongcomparatorcountries.64Theinefficiencyresultsfromapublicinvestmentmanagementprocessthatdoesnotplan,budget,ordeliverpriorityassetsontimeandinacost-effectivemanner.Thecapitalbudgetisunderspent,withspendingaveraging70to80percentoftheamountbudgetedinrecentyears.65AccordingtothelistofprojectscompiledfromtheAnnualDevelopmentPlansoftheNationalPlanningCommission,theaveragelifeofongoingprojectsismorethan11years,andof“nationalpride”projectsevenmore,around13years.Asubstantialincreaseininfrastructureinvestment,as



GDPoverthelastdecade.72Integratingfurtherintotheregionandtheworldthroughtradewillhelpdomesticfirmsaccessanenlargedmarket,gainexposuretobettertechnologiesandmorevariedintermediateinputs,andbecomemorecompetitive.42.Ontheregulatoryside,thisisattributableinparttotradepoliciesthateitherarenotsupportiveenoughorimpedefirmsfromaccessingforeignmarketsfortheiroutputortosourceinputs(bothgoodsandservices).Nepalhasconsistentlyappliedhighertariffsontheimportofintermediateandcapitalgoodsthancountriesintheregion.73Inmanycases,thisispurelymotivatedfromarevenuepointofview,astherearenodomesticindustriesthatneedprotection.TheenvironmentforFDIisalsonotsupportive.FDIhasbeenhurtbyunclearpolicies,complexprocedures,andinadequateinvestmentfacilitation,inadditiontolackofinfrastructureandpoliticalinstability.Entrybarrierstoforeigninvestmentincludeforeignownershiplimitations,sectorcaps,alongnegativelist,andrestrictionsonnonequitymodesofinvestment.Amongtheotherimportantrestrictionsaffectingforeigninvestmentinthecountryarethecumbersomeprocessesontherepatriationoffundsandthelengthyprocessesneededtohireforeignworkers.Further,thecountryhasimposedbarrierstoservicetradethathaveimplicationsforthequalityandcostofprovisionofkeybackboneservices(transport,telecommunications,finance).74

43.Althoughmigrationhasdeliveredgains,ithasaccentuatedexistingchallengesforexportgrowth.Remittancesarecontributingtoanappreciationoftherealexchangeratebyputtingupwardpressureonthepricesofnontradables.Inturn,theappreciationoftherealexchangeratefavorsimportsandbiasesagainstexportsbymakingdomesticgoodsuncompetitive.75Theimpactispossiblylargestonlow-value,low-marginmanufacturedgoods,whichaccountforasignificantshareofNepal’sexportbundle.Further,fromapoliticaleconomyperspective,risingimportsmadepossiblebyremittances,areanattractivetaxationbaseandincentivizeincreasedrelianceonimporttaxes.Thisaddstotheanti-exportbias,asdomesticexportersrelyonimportedgoodsaskeyinputsforproduction.44.Finally,significantgapsinaccesstofinanceforsmallerfirms,andunequalaccessacrossgenderandgeography,arefurtherhamperingjobcreation.Accesstofinanceforfirmshasshownsomeprogress,

ofproductivity,whichisindicativeoflimitedcontestabilityinthesemarkets.68Truckingandpublictransportationservicesareaprimeexample.Truckingandpublictransporterassociationshavebeenaccusedofpricefixing,particularlyregardingplyingonminorroads,aswellasapplyinghighchargesonservices,usingoldandworn-outvehicles,andoverloadingcargo.Thesearesustainedthroughaplethoraofgovernmentapprovalsandquotasthatdeterfreeentryandenforcementoflaws.69Whiletheimpactoflimitedcontestationofmarketsonpriceshasbeenquantifiedinthetruckingandpublictransportationsector,furtherevidenceonothersectorswouldhelpprioritizethesectorsinwhichimprovingcompetitionandregulationwouldhavethelargestwelfareimpacts.39.Insomesectorsthegovernmentisdirectlyengagedthroughstate-ownedenterprises(SOEs).Some,liketheNepalElectricityAuthority(NEA),playadualroleasregulatorandmarketplayerthatgivesthemsignificantmarketcontrol(discussedfurtherinsectionB4).Insomecases,SOEshavepreferentialaccesstostatesubsidiesorfinancing.7040.Theevidencepointstothesetwofactors:infrastructuregaps(particularlyinroadsandenergy)andlimitedcompetitionasthetwoprimaryconstraintstoproductivitygrowth.Ashasbeendescribed,bothareconsequencesofpoliticalinstabilityandweakinstitutions.Makingpoliticallyfeasibleprogressoneitheroftheseissueswillhavelargebeneficialimpacts.However,twofurtherconstraintsarealsoimportant:alackofopennesstoworldmarketsandinequitableaccesstofinanceforSMEs,women-ownedenterprises,andruralbusinesses.41.Nepal’sweaklinkswithworldmarketsisafurtherkeyconstraint.Nepalisasmalleconomysurroundedbyvibrantmarkets.Italsohaspotentialtoexpandtradewiththefast-growingeconomiesinEastAsiaandthePacific,withwhichitsubstantiallyundertrades.71 Embracingtradeandinvestmentiscrucialforgrowthanddevelopment,andyet,Nepalseemstobedoingneither.Exportshareshavefallen,participationinregionalandglobalvaluechainsislow,andattractionofFDIisunderwhelming.In2003,Nepalaccountedfor12outofevery1millionU.S.dollarsofworldwidetradeingoodsandservices.Butby2014,thisnumberhadfallenby25percenttojust9dollars.Foreigninvestmenthasaveragedjust0.2percentof



almost400percentofloanvalue.77Landandbuildingsareoftenusedascollateral,sohighcollateralrequirementsperpetuateinequitiesintheseassetholdingsbyrestrictingaccesstofinanceforthosewhodonothaveaccesstotheseassets.Theinstitutionalcapacityrequiredtousenon-collateralsolutionstoovercomelackofcreditinformationislacking.45.Insummary,creatingmoreandbetterjobsforallNepalesewillrequiremakingprogressoninfrastructureinvestmentandimprovingcompetitioninkeymarkets.Progressonneitherwillbeeasy,butitwillhavealargeimpactonjobcreationandproductivitygrowth.Moreandbetterjobswillalsorequireanincreaseinoutwardorientation—lowertariffsandbarrierstoFDI—sothatNepalcanbenefitmorefromthevibrantregionalmarketinwhichitislocated.Finally,improvingaccesstofinanceforSMEsandfemaleentrepreneurswillhelpthissegmentofthemarketgrow,asegmentthathasthepotentialtocreatemanynewjobs.

but40percentoffirmsstillreportaccesstofinanceasamajorconstraint.Significantgapsexistforsmallandmedium-sizedenterprises(SMEs),startups,women,andruralbusinesses.Thesearefirmsthatcontributesignificantlytojobcreationbutonly9percentusebankstofinanceinvestments,comparedto17percentonaveragenationally.76Accessislimitedbytherelativelyhighcost(forfinancialinstitutions)ofpersonalscreeningandduediligencefortypicallymodestloanamounts,andconcernsthatborrowersmightbeaccumulatingmanyloansfrommultiplelenders,potentiallyresultingintheirover-indebtedness.Aregulatorycaponthespreadoninterestratesthatfinancialinstitutions,domesticandinternational,canofferabovetheirbaseratefurtherreducestheabilityofcreditproviderstoaccuratelypriceinthisrisk,therebylimitingtheirabilitytotaketheriskonortoprovidelong-termfinancing.Whenfirmscanaccesscredit,financialinstitutionsrelyonconventionalcollateral-basedlendingapproachesgiventhelackofcreditinformationinthemarket.Collateraldemandsintheircasecanreach


varyinggeographyandagroecologicalconditionsposediversechallengesthatcallfornuancedstrategies.AlthoughlandreformwasakeydemandoftheMaoists,mostruralhouseholdsnowownland,althoughratesoflandownershipareloweramongdisadvantagedgroups.80LandinequalityishigherintheTarai,butitisnothigherintheTaraithaninothercountriesintheregion.8148.Theevidencepointstotwooverarchingconstraints:(a)underdevelopedmarketsandlimitedpostproductionvalueaddition,whichmakepricestoolowandvolatiletoencourageinvestment;and(b)lackofyear-roundirrigation,particularlyintheTarai.Enabling the Business of AgricultureshowedthatNepalrankedlowestontransportandwater(52ndoutof62countries).82Cerealyieldsarelowcomparedtoneighboringcountries,evenwhencomparingproductioninlowlandNepaltootherlowlandneighbors,suggestingthatavailabletechnologies

46.ThesameconstraintsthatlimitprivatesectorinvestmentandgrowthidentifiedinsectionB.2alsolimitthedegreetowhichNepalcanbenefitfromitsrichnaturalresources—land,water,andforests.Lackofinvestmentsindevelopingitshydropowerpotential,roads,andirrigation,andpoorregulationsandgovernanceofmarkets,aremajorconstraints.47.Agricultureremainstheprimaryemployerfor86percentofpoorpeople,makinggrowthinthesectorcriticalforpovertyreduction.However,growthinagriculturehasbeenlowandvolatile,drivenbyhigherrelativepricesforagriculturalcommoditiesandfavorablemonsoonsratherthananygrowthinproductivity.78Thereareopportunitiesforgrowth.Agriculturalproductshaveasizabledomesticmarket(Nepalisanetfoodimporter);andNepalhasuntappedcomparativeadvantageinproductionofnontraditionalhigher-valuecropssuchasapplesandalmondsinareasofhigherelevation.79Widely

This will require supporting private enterprise, improving planning and interagency coordination, and clarifying rules for sharing the benefits of resource creation.

3. Productive and sustainable livelihoods from Nepal’s land, forests, and water


tourism.Thecostsoftransactingamongregional,central,andbordermarketsisveryhighinNepal,causingfarmgatepricestobelowandhighlyvolatile.89Halfofthespatialandtemporalvariationinestimatedtransportcostsbetweenregionalandlocalmarketsisexplainedbyroadandbridgeinfrastructure.90FarmsinhilldistrictsthathavecloserproximitytoNepal’smajorNorth-Southroadlinksaremoreprofitable.91Betterconnectivitytomarketsontheborderwillberequiredtotakefulladvantageofexportopportunitiesfornontraditionalhigh-valueagriculturalproducts.Poorconnectivityalsomakesitdifficulttogetforestproductstomarkets.Inaddition,thereareinsufficientairportsservinghillandmountainareas,andtheexistingonesarenotkeptormanagedwell.Tourismofferssignificantpotential,butreachingmanydestinationsrequiresdevotingmultipledaystothejourney,makingthemeffectively“offthemap’”formosttourists.51.Thechallengestomarketdevelopmentinagriculturedonotcomefrominfrastructurealone.Truckingsyndicatesalsohinderintegrationbyraisingtransactioncosts,whichisparticularlycostlyformarketingoflow-valueaddedproductssuchascerealsandtimber.92Otherconstraints(asoutlinedinsectionB.2)thathinderthedevelopmentoftradelogisticsandagroprocessingenterprisesalsolimitmarketdevelopment.Inaddition,Nepallagsonphytosanitarycertificationandinspections,whichareimportantforexportmarkets,andondevelopingfarmerorganizations,whichcanproveparticularlyimportantinreducingthetransactioncostsassociatedwithsecuring

arenotbeingused.83Improvedextensionservices,fertilizerdistribution,accesstoland(particularlyintheTarai),mechanization,andcreditwouldincreaseproductivityanddiversification,butaddressingconstraintstomarketefficiencyandagribusinessinvestmentcanbejustaseffectiveinincreasingproductivitybyincentivizingproductiveinvestments.84Efficientmarketsareessentialtoenablinghouseholdstodiversifyoutofsubsistenceagriculture.InNepal,diversificationfromcereals(rice,maize,wheat,millet,barley,andbuckwheat)towardhigher-productivityfruitsandvegetableshasbeenlimited.85Theshareofcropproducedformarketislow—averagingabout10percentintheHillsandMountainsand20percentintheTarai(comparedto30percentinNepal’sstructuralpeer,Uganda)—andfallssignificantlywithincome(figure7)anddistance.86

49.Inagriculture,thelackofyear-roundirrigation,particularlyintheTarai,isoneofthebiggestconstraintstoraisingagriculturalproductivity.A2005studyshowedthattheincidenceofpovertyinirrigatedareasishalfthatinrainfedareasandthataccesstoirrigationwatermitigatespoverty.87ThehighestreturntoinvestmentintheTaraiisirrigation.88Somekeychallengesrelatetolessthanoptimalutilizationofdevelopedirrigationfacilitiesduetopoormaintenanceoftheexistingirrigationsystems.Irrigationsystemsneedtoberehabilitatedandmodernizedtomakethemresilient.50.Lackofroadinfrastructurehindersagriculturaldevelopment,betterutilizationofforests,and


302520151050

Percapitawater

availability(‘000cubicme-terspercapitaperyear)

Forestcover(%)

Waterproductivity(GDPinUS$/cubicmeter)

GDPcontributionoftheforestry

sector(%)

Contributionoftheforestrysectorto

agricultureandmanufacturing

GDP(%)

25.4

11

7

2.5 2.5 40.6 1.3 1.4

3.6

Figure7Nepal’snaturalresourcesareunderutilized,andalowshareofcropsaremarketed

SouthAsia(water),Bangladesh(forests)Nepal

Nepalhassignificantnaturalresourcewealth,butitcontributeslittletotheeconomy

Averageshareofcropsoldbyregionandconsumptionexpenditurequintile(Exp.Quint.)

Sources:WorldDevelopmentIndicatorsandJacoby(2017),usingRuralHouseholdSurvey2016.

HillsMountains Terai

0.25

0.2

0.15

0.1

0.05

0Exp.

Quint.12 3 4 Exp.

Quint.5


electricitysupply,solelymanagingtransmissionofelectricitytodomesticloadcentersaswellastoandfromIndia,anddistributingelectricitytoconsumersacrossthecountry.Thesefactorsputitatasignificantadvantageinnegotiationswithprivatepowerproducersandcreateconflictsofinterest.Asthesoleofftakerofallelectricitygenerated,itoverseesnegotiatingPowerPurchaseAgreementswithprojectsdevelopedbyindependentpowerproducers,aswellasitsownsubsidiarycompanies.95TheNEAhasnotdevelopedinternationallybankablestandardProjectDevelopmentAgreementsorPowerPurchaseAgreementsthatcanaidprivatesectorinvestments.OtherpotentialareasforconflictofinterestincludethetimethatNEAtakestocompletePowerPurchaseAgreementnegotiations,andtheprioritywithwhichitinvestsinbuildingthenecessarytransmissionlinesforprojectsdevelopedbyindependentpowerproducerscomparedwithitssubsidiaries.96ComplimentaryinvestmentsofUS$11.6billionofnewtransmissionlinesandupgradesofthedistributionsystemarerequiredforthisnewcapacitytoreachconsumers.However,thesehavebeendelayedinmanycasesbydelaysinlandacquisition.Overall,thereisaneedtocreatearationalizedsectoroperatingmodelthatclarifiestherolesofvariouspublicinstitutionsregulatingandoperatinginthesector,andstandardizationofprocessesanddocuments.Addressingtheseconstraintswillbeessentialtoencouragingprivateinvestmentinthissector.54.Developmentofnaturalresourcesisalsoconstrainedbylackofplanningandinteragencycoordination,andlackofclarityonrulesforsharingthebenefitsofresourcecreation.Waterresourceplanning,forexample,isfragmented.Themanagementofwaterresourcesisspreadacrossfiveagenciesthatdonotplanorimplementactivitiesandinvestmentsinacoordinatedmanner.AlthoughNepalhasadoptedapolicyofintegratedwaterresourcemanagement,implementationremainspoorduetotheneedtocoordinateacrossmultipleagencies.Althoughinvestmentsinirrigationinfrastructureareneeded,theyarelikelytohavemodestimpactifnotcombinedwithimprovedwaterdistributionandefficientmanagement.ThisiscurrentlyhamperedbyweakparticipationofWaterUsersAssociationsandweakinstitutionalcapacity.97Theagriculturesectorsuffersfromweakcoordination,planning,andimplementationamonglineministries,andbetweenlocalandcentralgovernment.

apredictablesupplychainofadequatequalitywhenproducersaregeographicallydispersed.93AlthoughlimitedmarketdevelopmentconstrainstheproductivityofnaturalcapitalinallofNepal’sregions,itsnaturevaries:theinfrastructurechallengesinaccessingmarketsaremoresevereintheHillsandMountains,whilethestrongcompetitionfromIndia(wherefertilizerishalfthepricegivenlargerdomesticsubsidies)makesmarketefficiencyevenmoreimportantinthebetterconnectedTarai.Addressingthesedifferentconstraintsisimportanttoreducingspatialinequality.52.Therearemanyopportunitiesforprivatesectorinvestmentinhydropowerdevelopment.Therearecurrentlyabout8,500megawattsofprojectsunderdevelopment,withinvestmentcostsofaboutUS$15billion,oralmost80percentofGDP.However,progresshasbeenslow,andprojectshavefacednumerousdelays.Nepalalsoneedstodevelopmoreoff-gridtechnologiessuchasmicrohydropowerandsolarandwindenergythatmaybeviablemeansofprovidingsmaller-scaleelectrificationtoruralandremoteplaces,andwhichhavetheadditionalbenefitofbeingmoreenvironmentallyfriendly.Intransmissionanddistribution,thereisaneedtobringdowntechnicalandcommerciallosses,whicharecurrentlyhighataround25percent.Potentialpublic-privatepartnershipsintransmissionanddistributioncouldhelp.Theseinvestmentscanprovidenotjustconsumptionbenefits,butalsopromoteashifttowardgreaterentrepreneurialactivity,andformalemployment,thoughtheimpactislikelytobesmallerthangridconnections.94

53.Thehydropowersectorsuffersfromweakpolicy,aninsufficientregulatoryframework,andweaksupportinginfrastructure.Nepallacksalong-termcomprehensivegenerationexpansionplanthatconsiderselectricityimports,andsolar,wind,andhydropower,collectively.Thoughthegovernmenthasannouncedplanstoadd17,000megawattsoverthenextsevenyears,itisunclearhowthiswillbeachieved.Institutionalandregulatoryframeworksneedtobestrengthened.Cumbersomeprocessesarerequiredtoobtainclearances,getsubsidies(inthecaseofoff-gridoptions),andovercomeotherregulatoryhurdles.ThereisalackofalevelplayingfieldforindependentpowerproducersduetothestrongNEApresenceingenerationandcontrolovertransmissionanddispatch.TheNEAdominatessectoroperationsbygeneratingoverhalfofNepal’stotal



requiredtobesharedwiththelocalcommunitiesaffectedby,forexample,hydropowergenerationfacilitiesortourisminvestments.Similarly,thelegalrightstobenefitfromvariousforestproductsarescatteredacrossvariouslawsandinstitutions,andtheprocessofallocatingpermitsforvariousforestproductsiscomplexandlackstransparency.Thishasresultedinjurisdictionaloverlaps,inappropriateassignmentofroles,andinstitutionalinefficiencies,aswellassomegapsinthepermitallocationsystemsforforestactivitiesandproducts.Cumbersomepermitproceduresarebiasedinfavorofpowerfulelites.100

57.Insum,whileNepal’sland,forests,andwaterprovideproductiveandsustainablelivelihoods,someofthesameconstraintsthatlimitprivatesectorinvestmentandgrowthidentifiedinsectionB.2needtobeaddressed.Specifically,infrastructureinhydropower,roads,andirrigationneedstobebuilt.Bettergovernanceoftransportservicesisneededforroadinvestmentstocontributetomoreefficientmarkets.Inaddition,betterregulationsforsharingthebenefitsfromnaturalresourcedevelopmentandclarityoninstitutionalarrangementstosupportandprotectnaturalresourcemanagementareneeded.TheongoingCountryPrivateSectorDiagnosticwillfurtherassessconstraintsandopportunitiesforprivatesectorinvestmentinagribusinessandtourism,amongothers.

Similarly,intheforestsector,thereisalackofintegratedlandscapemanagement.Further,themanagementofforestsisdividedbetweenthefederalgovernmentandlocalcommunities,withweakinteragencycoordination.ThefragmentationofinstitutionsalsopreventsNepalfromrespondingtothechallengeofclimatechangeeffectively.55.Currentgovernmentprocessessupportthislackofcoordination,becausefinancingisactivity-basedandtherearenoincentivestocollaborate.Thecomplexityofinstitutionalarrangementsisa“humanlydevisedconstraint,”98andwhileitisnotclearwhetheranygroupbenefitsfromthiscomplexity,itisnotbenefitingthepublicgood.Thereisariskthatthenewfederalstructurecouldleadtoafurthersplitofresponsibilities,whicharealreadypoorlycoordinatedacrossagencies.56.Revenue-sharingarrangementsforinvestmentsinnatural-resource-basedgoodsandservicesneedtoensurelocalaffectedcommunitiesbenefitfromsuchinvestments.Taxandroyaltysharingarrangementsarescatteredacrossavarietyoflaws,regulations,andinstitutions,makingthemdifficulttomonitorandenforce.Thenewfederalstructureallowsforroyaltysharingtothefederal,provincialandlocalgovernments.Whilelocalgovernmentscanbenefitfromsuchtaxesandroyalties,fewbenefitsarelegally


This will require addressing inequities in basic services based on proximity, affordability, and social norms; more information and competition in domestic job markets; tackling high malnutrition; and developing quality secondary and tertiary health and education services.

4. Equitable investments and use of human capital

58.Nepalhasmadeimpressivegainsineducationandhealthandperformsrelativelywellcomparedtoitsstructuralpeers.Lifeexpectancy,at70yearsatbirth,isabovetheregionalaverageandtheaverageforNepal’sstructuralpeers.Theyouthliteracyrateis85percentinNepal,higherthantheSouthAsiaregionaverageof83percent.AccesstogoodsanitationandcleanwateriscomparativelyhighinNepal.10159.However,progresshasalsobroughtkeychallengestolight.Progressatthenationallevelbeliessignificantinequitythatremainsininvestmentsinhealthandeducation,andtheabilityofindividualsto

usethehumancapitaltheyacquire.Highratesofmalnutritionalsoensurethatinequalitiesatbirthpersistintoadulthood.Inaddition,Nepalhasstruggledtogobeyondcommunity-ledbasicserviceprovisiontoaddressmorecomplexchallenges,suchasprovisionofcurativehealthservices,andhigh-qualitysecondaryandtertiaryeducation.Makingprogressonthesechallengeswillbeessentialtoensuringpoorhouseholdscaninvestinandusetheirhumancapital.60.Spatialandsocioeconomicdisparitiesinhealthandeducationinvestmentsareconsiderable.Healthandeducationinvestmentsdivergebasedonachild’s


resultedinthefastestrecordeddeclineofstuntingratesintheworldfrom2001to2011,108butNepalalsostartedwithoneofthehighestglobalratesofstunting,andratesofmalnutritionandwastingamongchildrenunderfiveyearsofagearestillveryhigh(figure9).Thus,malnutritionratesinNepalaremuchhigherthaninthecountry’sstructuralpeers.Theannualeconomiccostofmalnutritionwasanestimated2to3percentofGDP,usingdatafrom2006.Malnutritionrateshavefallensincethen,butthecostislikelytobeofthesameorderofmagnitude.109Placeswiththehighestratesofmalnutritionhavethehighestratesofdiarrhealdiseaseandaflatoxinexposure,suggestingfurtherprogressingoodsanitarypractices,accesstocleanwater,andfoodstorageareneededinsomedistricts.110However,otherstudieshighlighttheneedformoreprogressoninadequatematernaldietsduringpregnancy,complementaryfeedingpractices,anddietarydiversity(particularlyamongchildren).111Moreevidenceonwhichinterventionshavethelargestimpactonreducingmalnutritionindifferentdistrictswouldhelpprioritizelocalinvestments.63.Evenwhenindividualshavetheskillsandgoodhealththeyneed,underdevelopedlabormarketsandgendernormslimittheirabilitytoaccessjobsthatareavailable.112Socialnetworksdominateaccesstojobs,reinforcinginequalities.Only10percentofyouthwhoareemployedfoundtheirjobthroughanadvertorjobcenter;mostjoinedthefamilybusinessorfoundtheirjobthroughfamilyandfriends(figure8).Two-thirdsofindividualswithpostsecondaryeducationworkinthepublicsector,113andassectionB.1documented,accesstothesejobsishighlyskewedtocertainsegmentsofthepopulation.Regionalconsultationsrepeatedlypointedtotheproblemofpatronageandnepotismindeterminingwhohasaccesstojobsandgovernmentcontracts.Theoneexceptionisnon-Indianmigrationopportunities,whicharelargelyfoundthroughformalmeans.Genderisalsoasignificantdeterminantoflabormarketoutcomes,bothdomesticallyandinternationally,asfewwomenmigrate.114Althoughfemalelaborforceparticipationishigh,thequalityoftheworkwomenareengagedinislow,largelybecauseofstronggendernormsaroundwork.Womenaremorelikelytobeengagedinunpaidwork.115Whentheyareinpaidwork,theyareconcentratedininformalemploymentandinagriculture,andwhentheyareemployedinwagework,theyreceivebetweenhalfandtwo-thirdstheearningsofmen.116

locationandparentalcharacteristics(figure8).Startingprimaryschoolontime;finishingprimaryschoolontime;beingwell-nourishedinearlychildhood;andhavingcleanwatertodrink,adequatesanitation,andelectricityareinlargepartdeterminedbyachild’sgender,parentalwealthandeducation,andlocation(urbanorrural;Mountains,Hills,orTarai;central,eastern,midwestern,orfarwesternregion).Anestimated52to79percentofthevariationcanbeexplainedbythesecharacteristics.102Differencesinlocation,parentalwealth,andeducationoften,butnotalways,reflectdifferencesinethnicityandcaste.103Inequityinthequalityofhealthandeducationservicesisalsopronouncedalongtheselines.AnalysisofperformanceonnationalexaminationssuchastheSchoolLeavingCertificateortheNationalAssessmentofStudentAchievementadministeredtoeighthgraders,showtheoddsofpassingtobeskewedinfavorofchildrenwithfavorablebirthcircumstances.10461.Thechallengesofprovidingservicesinremotelocations,therelianceonprivatelyfinancedinvestments,andvariationsinsocialnormsunderpinthesedisparities.Schoolquality,proxiedbytheeducationoftheschoolprincipal,fallswithremoteness,reflectingthechallengeofqualityserviceprovision—publicorprivate—inmoreremotelocales.105Thequalityofhealthservicesinremoteareasiscompromisedduetolackofinfrastructure,frequentabsenteeismofserviceproviders,andshortageofdrugsandsupplies.106Asaresult,humancapitaloutcomesarehighlyunequalalongspatiallines.Thepredominanceofprivateinvestmentsineducationandhealth(onprivateservicesandfeesinpublicservices)reinforcesinequitiesalongwealthlines.Spendingonhealthandeducationandprivateschoolattendanceincreaseswithwealth.107Inaddition,regionalconsultationshighlightedthatsocialnormsandtheexpectedbenefitsofeducationvaryacrosscommunitiesandreinforceinequalitiesalonggenderandspatiallines.62.Highratesofmalnutritionreinforceinequalityofopportunity.Lackofadequatenutritionduringachild’sfirst1,000days(fromconceptiontohisorhersecondbirthday)isstronglyassociatedwithlowercognition,executivefunction,andschoolattainmentlaterinlife.ImprovementsinNepal’sfoodsecurity,maternaleducation,andaccesstogoodsanitation,cleanwater,andbasichealthservices



resolved.Firmsdonotprovidemuchtrainingtoemployees,perhapsbecausetheyarenotlargeenoughtobenefitfrominvestingintraining.Firmsthatprovidetrainingtotheirworkerstendtobe,onaverage,largerandmoreopentotrade,andhavehigherforeignownershipandaworkforcewithmoreyearsofformalschooling,andtherearefewoftheseinNepal.122NepalthusperformspoorlyontheGlobalCompetitivenessIndexonhighereducationandtraining,whileperformingwellonprimaryeducationandhealth(figure9).AsNepaltransitionstoafederalstructure,thechallengeitfacesistoprotectthegainsmadeinprimaryserviceprovision,whiledoingmuchbetterindeliveringqualitysecondaryandtertiaryhealthandeducationservices.Educationandhealthserviceswerestructureddifferentlywithdifferentpoliticaleconomychallenges,yetintheabsenceofinclusiveandaccountablepublicinstitutions,bothstructuresfailedtodeliverqualitysecondaryandtertiaryhealthandeducationservices.Thehealthsectorresisteddevolutionandhasbeenhighlycentralized,whichhasresultedincorruptioninprocurementinthecentralgovernmentandinadequateplanningthatdoesnotmeettheneedsoflocalpopulations:72percentofprimaryhealthcenters,69percentofhealthposts,87percentofsub-healthposts,and50percentofhospitalssurveyedhadexperiencedstock-outsofoneormoreessentialdrug,rangingfromonetonineweeks.123Devolutionofeducationservicesintheearly2000swasmuchmorecomplete.However,intheabsenceoflocalelections,devolutionresultedinampleroomforcollusionandpatronagepoliticsatthelocallevel.124

64.AddressingthesedriversofinequityintheacquisitionanduseofhumancapitalisessentialtoaddressingthefundamentaldriversoffragilityinNepal.Inequalityintheuseofhumancapitalisalsoinefficient,andaddressingtheseinequitieswillalsocontributetogrowth.Addressingsomeofthenormsthatlimiteducationalinvestmentsandthatshapewhogetsaccesstowhichjobscanbechallenging,butrecentexperiencesinbehavioralinterventionsaddressingaspirationsandgenderroleshasshownthatsomeprogressispossible.11765.Inaddition,althoughNepalhasbeenabletoachievemuchthroughcommunity-ledbasicserviceprovision,itneedstogobeyondthattoprovidequalitysecondaryandtertiaryhealthandeducationservices.Forexample,Nepalcompareswelltopeersontheshareofwomenreceivingprenatalchecks,butpoorlyontheproportionofbirthsbeingattendedbyskilledhealthworkers.118Lessthanhalfofhealthfacilitiescanoffernormalvaginaldeliveryservices(and5percentcesareans).119Similarly,primaryenrollmentratesareabovethoseofstructuralandregionalpeers.Althoughthereissignificantroomforimprovingthequalityofprimaryeducation,thequalityisnotsubstantiallylowerthanthatofstructuralandregionalpeers.120However,secondaryandtertiaryenrollmentratesarelower,inpartreflectinglowerpublicspendingonsecondaryandtertiaryeducation(figure9).121TheremayberoomfortheprivatesectortoplayastrongerroleinprovidinghealthandeducationservicesinNepal.Constraintstotheirgreaterinvolvementneedtobestudiedand


Figure8Inequalitiesininvestmentsinanduseofhumancapital

Finishedprimaryontime

ChampaisfromruralSiraha,herparentsareilliterate,andshebelongstotheDalitcommunity

AviditisfromurbanKath-mandu,hisparentshaveauniversityeducation,andhebelongstotheuppercaste

Electricity

Adequatesanitation

Cleanwater

Probabilityofhaving...

Sources:WorldBank2016a;RajuandRajbhandari2017.

Sourceofinformationonjob

Relatives,friends,andneighbors

Recruitment/employmentagencies

Other

DonotknowOtherexternaldestinations

India

Otherexternaldestinations

100%80%60%40%20%0%

Internaldestinations

India

Internaldestinations

Female

Male

37

56

78

52

75

33

100%80%60%40%20%0%


services,andtomodernizethedomesticlabormarketandequalizeaccesstojobs.Inaddition,thedeliveryofqualitysecondaryandtertiaryhealthservicesinafederalNepalneedtobeimproved.

Insum,Nepalhasmadetremendousprogressinimprovinghumancapital,butimportantinequitiesinhealthandintheacquisitionanduseofeducation,needtobeaddressed.Actionisneededtoaddressinequitiesbasedonproximityandaffordabilityof


Figure9Malnutritionandprovisionofsecondaryandtertiaryservicesarestillachallenge

Sources:WorldwideGovernanceIndicatorsandWorldDevelopmentIndicatorsusingFindmyFriends.

MalnutritionratesareveryhighinNepal,asforothercountriesinsouthAsia

Nepalperformswellonprimaryeducation,butpoorlyonsecondaryandtertiaryeducation

StructuralpeersNepalRemittancedependent SouthAsiaregion

100

80

60

40

20

0Healthandprimaryeducation(GCI)

Governmentexpenditureperstudent,primary

(%ofGDPpercapita)

Primaryeducationenrollment,net(%)

Highereducationandtraining

(GCI)

Secondaryeducationenrollment,gross(%)

Tertiaryeducationenrollment,gross(%)

Governmentexpenditureperstudent,secondary(%ofGDPpercapita)

StructuralpeersNepalRemittancedependent SouthAsiaregion

40

30

20

10

0Malnutritionprevalence,

heightforage(%ofchildrenunder5)

Malnutritionprevalence,weightforage

(%ofchildrenunder5)

Prevalenceofwasting(%ofchildrenunder5)

Lowincome

This will require reducing environmental risk by addressing deforestation and improving watershed management, improving targeting and coverage of social protection, and enabling the development of insurance markets, particularly in health.

5. Strengthening resilience to natural disasters and health shocks

66.ThedegreeandnatureofvulnerabilitytonaturaldisastersandhealthriskvariesacrossNepal.Theeasternpartofthecountryiswetterandthewesternpartismorearidandexposedtogreaterclimaterisk.RainfalllevelsareonaveragehigherintheTarai,butdroughthasthelargestmonetaryandwelfareimpactthere.125Droughtalsohasalargerimpactonwelfareinplaceswithloweraccesstomarkets(localproductionshockshavealargereffectonlocalfoodpricesinremoteareas,highlightingthepotentialimpactofinfrastructureinvestmentonreducingvulnerability).126Healthriskislargerinmoreremoteregionsbecauseaccesstohealthservicesismorechallenging.Thus,themostimportantconstraintstoreducingvulnerabilityvaryacrossthecountry.

67.SomeofthesourcesofenvironmentalriskfacingNepalarebeyondhumancontrol,butnotall,andmuchmoreactionneedstobetakentoreduceexposuretorisk.Forexample,glaciallakeoutburstfloods(GLOFs)andlandslidesposeasignificantnationalandregionalriskthatisincreasingduetoclimate-change-inducedglacierthinningandretreatintheHimalayas.Nepalhasrecentlyexperienced24GLOFevents,severalofwhichhavecausedconsiderabledamageandlossoflife.127Inthenon-Himalayanregion,climatechangeprojectionsindicatethattheriskoffloodingwillincreaseconsiderablyinNepaleseriverbasinsbecauseofhighermonsoonprecipitation(aprojectedincreaseof14to40percentbythe2030sand52to135percentbythe2090s).


theearthquake,publicsafetynetsareinfrequentlyrelieduponbypoorhouseholdstocopewithdisasters(figure10).Transfersarepoorlytargetedtopoorhouseholds(thesameproportionofhouseholdsinthebottom40percentandtop60percentreceivedgovernmenttransfersin2014),aresmall,anddonotscaleintheeventofadisaster.130Therefore,theimpactofsocialprotectionprogramsonpovertyorinequalityismorelimitedthanitcouldbewithbettertargetingandscalability.131Disastersneedtobetackledwithincreasedpreparedness,strengthenedcapacitiesforreliefworkduringdisaster,andinstitutionalizedcapacityforpost-disasterrebuildingandrecoveryefforts.Inthenewlyestablishedfederalpoliticalstructure,thiswillrequirestrengtheningthecapacityoflocalgovernmentstorespond.70.Publichealthcaredoesnotinsurehouseholdsfromthecostsofcare.Healthcareservicesthatareofferedforfreeoratasubsidizedratearelimitedtoprimaryandsomebasicsecondaryhealthcareservicesandtocertaindiseasesorconditions,andincreasinglythiswillnotmeetmosthealthneeds,withthechangingpatternofdisease.Inmoredevelopedareas,privateprovidersaremorereadilyavailableandperceivedasprovidingbetterqualitythanthepublichealthsystem,causinghouseholdstoinvestinprivatecare.Out-of-pocketexpenditurescomprise48percentoftotalspendingonhealthcare,whichiscomparativelyhigh(figure10).Theycomprisemorethan4percent

68.Whileactioncanbetakentoreduceexposuretoenvironmentalrisk,therehasbeenlimitedactiontodoso,particularlytoflooding.Floodriskisincreasedbydeforestationandpoorcatchmentmanagement,andcanbereducedbyenvironmentalstewardshipthroughimplementationofwatershedmanagementpractices(suchasgroundcover,gullycontrol,contourbunding,andafforestation).Addressingthedriversofdeforestation(increaseddemandforforestlandandproducts,lackofaccesstoimprovedtechnology,absenceofaninclusiveforestpolicyprocess,weakruleoflaw,andsocialinequality)isalsoanimportantpartofNepalmeetingitsNationallyDeterminedContribution.128Nepalaimstoenhanceitsforestcarbonstockbyatleast5percentfromits2015levelby2025,andtodecreasethemeanannualdeforestationrateby0.05percent.129Evidenceonhowmuchtheriskoffloodingcanbereducedbyaddressingdeforestationandimprovingwatershedmanagementpracticeswouldbeuseful.Similarly,investmentsininfrastructureandhousingneedtobemadetomakethemmoreresilienttofloodsandearthquakes.69.Whenshocksoccur,theyhaveabigimpactonwelfareinpartbecausepublicsafetynetsarenotreadytoscaleintheeventofadisaster.Householdshavefewsafetynetorotherrisk-poolingmechanismssuchasinsurance(publicorprivate),whichtheycanusetomanagetheimpacts.Exceptforsupportreceivedafter


Figure10HouseholdsinNepallackaccesstopublicandprivateinsurancemechanisms

Sources:NepalHouseholdRiskandVulnerabilitySurvey,2016(sampleframeexcludesmetropolitanareasasdefinedin2010Census),andFindMyFriendsusingHealthNutritionandPopulationStatistics.

Out-of-pockethealthexpenditureasashareoftotalhealthexpenditures(percent,2014-16)

50

40

30

20

10

0Nepal Strutural

peersRemittancedependent

Lowincome SouthAsiaregion

Self-reportedcopingstrategiesofshock-affectedhouseholds,non-metropolitanNepal,2016

Allothershocks2015Earthquake

Spendsavings

Reducedfoodconsumption

Reducednon-foodconsumption

Borrowed

Interruptededucation

Workedmore

Soldassets

Changeinlivingarrangements

Assistancefromrelatives,friends

Assistancefromgovernment

Assistancefromotherorganizations

50%40%30%20%10%0%


andsaveinformalinstitutions,isonparwithorhigherthanincomparatorcountries,suggestingthatfinancialinclusionperseisnotamajorconstrainttoaddressingvulnerability.134However,savingsareinadequateforlargerorrepeatedshocks,andaccesstocreditandinsuranceislimited.Somehouseholdsreportedborrowingtocopewithshocks(figure10),butthisisprimarilyfromnonformalsourceswithhighaverageannualinterestratesof25percent,and5percenthigherforpoorerhouseholds.135

ofthetotalconsumptionofhouseholdsinthebottom40percent,pushingmanyofthesehouseholdsintopoverty.132Asocialhealthinsurancesystemhasbeeninitiated,butitscoverageisverylow.71.Privateinsurancemarketsareweak.Nohouseholdsreportusingprivateinsurance.Transfersfromfamilyandfriendsarethemostcommonsourceofcashinthefaceofemergencies,followedbysavings.133Theproportionofhouseholdsthatsave,


72.Inthemediumterm,large-scaleinternationalmigrationwillremainanimportantfactoflifeinNepal.TheSCDhashighlightedkeyconstraintstotheavailabilityofandaccesstojobsinNepal.Iftheseconstraintscanbeovercome,thebenefitsofstayinginNepalwillincreaseandinternationalmigrationwillfall.However,progresswilltaketime.IstheremorethatNepalcangetfrommigrationinthemeantime?73.RemittancesandreturneemigrantsrepresentopportunitiesforNepal—opportunitiesforinvestmentandentrepreneurship.AddressingtheconstraintstoinvestmentandentrepreneurshiphighlightedinsectionsB.2andB.3areessentialtoNepalgettingmorefrommigration.Theconstraintstotheuseofremittancesforproductiveinvestmentarenodifferentfromtheconstraintshighlighted,andthereislittleevidencetosuggestthatthecostofremittingishigh.Thereisalsolittleevidencethattherearespecificlabormarketconstraintsfacedbyreturnees,justbecausetheyarereturnees.However,ratesofemploymentareloweramongreturneemigrantsthanamongthosewhohavenevermigrated.136Thiscouldbeexplainedbythefactthattheyareabouttomigrateagain,orbythefactthattheiremploymentaspirationshavechanged.Mostmigrantswereinagriculturebeforetheymigratedandgainedexperienceinnonagriculturalsectorswhileabroad.137Althoughsomewishtogobackintoagriculture,many(68percentofthosewhoplantostay)wishtobecomeentrepreneurs.138However,bankinglendingpracticesimposeaseriousconstrainton

This will require addressing constraints to private sector growth so that Nepal benefits more from the skills, entrepreneurial desire, and cash of returning migrants; providing training and information for migrants; and diversifying destinations.

6. Getting more from international migration and remittances

someofNepal’smostinnovativeandtechnically-skilledreturnees.Mostdonotownland,whichpartlyexplainswhytheyhadgoneabroad,andsoareunabletomeetthecollateralrequirementsofbanks.Consequently,eventhoughmigrantsgenerallyhavegoodaccesstofinancialservicesbecauseoftheirneedtoremitincomeandsohaveestablishedrelationshipswiththebankingsystem,anddespitehavinggenerallyhighincomelevels,only8percentcanaccessbankcredit139.74.Ensuringsafeandremunerativeinternationalmigrationandremittancesisalsoimportantforwelfareintheimmediateterm.Theevidencepointstotwokeyconstraintsinthisregardthatneedtobeaddressed:

i. Lackofinformation,language,andsoftskillsonthepartofmigrants.Mostmigrants(55percent)reporthavingaproblemintheirdestinationcountry.Inmostcases,thisisduetothetermsofwork:40percentwerepaidlessthanagreedand41percenthadajobdifferentfromtheoneintheagreeduponcontract.140Migrantstendtooverestimatehowmuchtheycanearn.141Providingmoreinformationonunexpectedworkingconditionsandotherproblemsmigrantsfacewouldhelpfirst-timemigrantsbemoreprepared,knowwhattoexpect,andknowwhatrecoursetheyhave.Itmayalsohelpsomewould-bemigrantstobetterunderstandwhethertheywillinfactbenefitfrommigrating.Evidenceshowsthatindividualsrespondtoinformationwhenprovided


75.Inaddition,moreevidenceisneededtodeterminewhetherthecostofnon-Indiamigrationisprohibitiveforthepooresthouseholds.Thecostofnon-IndiainternationalmigrationismuchhigherthanIndiamigration,andthereisatendencyforindividualsfrompoorerhouseholdswithlowerlevelsofeducationtomigratetoIndiaratherthantotheGulforMalaysia.144Althoughdataonthecostsofmigratingarelimited,thecostdatathatareavailabledonotsuggestthatthecostsoftravelandfeesassociatedwithnon-Indiamigrationareparticularlyhigh.145However,theadditionalcostsincurredviainterestratesonloanstocoverthecost,andthecostsofworkingthroughmanpoweragents,makethecostsmuchhigherforsomepeople.Householdsurveydatarevealthathouseholdswithmigrantsaremorelikelytobeindebtthanthosewithoutmigrants,andinterestratescanbehigh.146Moreevidenceonthisisneeded.Itcouldbethatfinancialmarketdevelopmentformigrationloansmightmakethemostbeneficialformsofmigrationmoreavailabletopoorhouseholds.

inaclearandconcisemannerbychangingtheirpriorsandbeliefs,andbychangingtheirmigrationdecision.142Inaddition,learningthelanguageinthedestinationcountryandsomebasiclawsandlegalrightswouldhelpmigrantsnegotiateforbetterworkingconditionswhenpossible.Migrantsreportnoshortageofsourcesofinformationpriortodeparting,butnearlyhalfwerenotsatisfiedwiththeinformationreceivedbecauseitwasinaccurateorinadequate.143Makingmigrationsafermayalsomakeitpossibleformorewomentomigrate.

ii.Macro-levelriskfromanundiversifiedpoolofmigrantcountries.EighteenpercentofNepaleseareoutofthecountry,ofwhich6percentgotoIndiaand10percenttoMalaysia,Qatar,SaudiArabia,andtheUnitedArabEmirates.Demandformigrantworkerstoanyonedestinationissubjecttothespecificeconomicandpoliticalshocksthatcountryfaces.Ofconcernisthatsomeofthesecountriesarevulnerabletothesamemacro-shocks,potentiallyrenderingthetotaldemandforNepaleseworkersquitevulnerable.Diversifyingthepoolofcountrieswouldhelpreducetherisk.Anadditionaljustificationfordiversifyingistoexploreemploymentinlabormarkets(suchasinEastAsiaandEurope)thathavebetterlaborlaws,transparentvisasystems,andprotectionofmigrantworkers,includingthepossibilityofbettercontractenforcement.Diversifyingintomoreskilledmigrationseemslessfeasible.



SUMMARY OF PRIORITIES


Publicinstitutions Privatesectorinvestment Humancapital Naturalresources Resilience Morefrommigration

Supportforthefederaltransitionandincreasedinclusivenessinthepoliticalprocess

Encourageinvestmentsininfrastructure(roads

andelectricity)

Addressbarrierstohealthandeducationposedbyremoteness,lowincome,andnorms

Supportagriculturalgrowthbyimprovingmarketaccess,andyear-roundirrigation

(particularlyintheTarai)

Increaseactiontoreduceenvironmentalrisk

Inadditiontoaddressingconstraintstoprivatesector

investment:

Improveaccountabilityandstrengthenrule

oflaw

Strengthenregulationandreducegovernmentinvolvementinmarkets

Reducetheroleofsocialnetworksandnepotismin

labormarkets

Enableprivatesectorinvestmentin

hydropower

Improvetargetingandcoverageofsocial

protection

Provideinformation,language,andsoftskillsfor

migrants

Investincapacityatsubnationallevels

IncreaseopennessbyreducingtariffsandincreasingFDI

Reducehighmalnutritionrates

Improveplanningandinter-agencycoordination

Enablethedevelopmentofinsurancemarkets,particu-

larlyinhealthDiversifydestinationsfortemporarymigration

Increaseaccesstocreditforwomen,ruralentrepre-

neurs,andSMEs

Supporttheprovisionofqualitysecondaryhealthandeducationservices

76.TheSCDhashighlightedprioritiesineachofthesixareasforaction,summarizedintable3.Themostimportantprioritiestoaddressareconsideredinbold.TogethertheseactionswouldallowNepaltotakeadvantageofopportunitiesforgrowthandpovertyreductionthatarebeingmissed,wouldaddresssourcesoffragility,andwouldincreaseresilience.Failingpublicinstitutionsunderliemanyofthechallengesdiscussed.Federalismisahugeopportunitytoaddressthisconstraint,anditisaprioritytosupportNepal’stransitiontofederalismtoensurethatitresultsinmoreinclusivepublicinstitutions,andsothataccountability,theruleoflaw,andcapacityforgoverningarestrengthened.Politicallyfeasibleprogressintheotherareasidentifiedisalsoneededtoaddressconstraintstoprivateinvestment—particularlyinnaturalresourcesectorssuchasagriculture,hydropower,andforests—throughinvestmentininfrastructure,theremovalofbarrierstocompetitionthatcurrentlyconstrainprivateinvestment,andgreateropennesstoexternalmarkets.ItisalsonecessarytoensurethatallNepalesehaveequalaccesstothejobscreatedbyaddressinginequitiesinbasicservicesbasedonproximity,affordability,andsocialnorms;allocatingjobsonmerit;tacklinghighmalnutrition;anddevelopingqualitysecondaryandtertiaryhealthandeducationservices.

77.Consultationsconfirmedtheseconstraintsaskeychallengesthatcitizensfaceintheireverydaylives(seeconsultationsannexforfulldetails).Regulationsandgovernmentinvolvementwererankedasthemostimportantsetofconstraintsinjobcreation,acrossallsurveys.Accesstomarketsandregulationswererankedmostimportantfornaturalresourcedevelopment.Qualityofservicedeliverywasthekeyissueforrespondentsoftheface-to-faceand

Summary of Priorities

Facebooksurveys,butforthelesseducatedSMSrespondentsfrompoorerdistricts,accesstobasicserviceswasmoreimportantthanquality.Therewasnear-unanimousagreementthatthemainconstrainttoresilienceistakingcareoftheenvironment,andthatgettingmorefrommigrationrequiresmoreopportunitiesforreturnmigrantstoinvesttheirskillsandcapital.

78.AlthoughmanysurveysareconductedinNepal,thereisalackofcurrentofficialdataonhouseholdwelfare,labormarketperformance,andfirms.Itisurgentthatinvestmentbemadeinupdateddatathatallowdisaggregationofthesestatisticsforthenewlycreatedprovinces.Inaddition,analysisofkeydevelopmentchallengescanhelpencourageevidence-basedpublicdiscourseonpolicypriorities.TheSCDhighlightedkeyknowledgegapsinthisregard.Thekeyknowledgegapsinclude(a)povertytrendssincetheearthquake,blockade,andslowdownofremittances;(b)howbesttoincreasetheaccountabilityandstrengthenthecapacityoflocalgovernments;(c)theimpactoflackofcompetitioninspecificsectorsonjobcreation,prices,andwelfare;(d)thepotentialforreducingenvironmentalvulnerabilitythroughinvestmentsandofwhattype;(e)thepoliticaleconomyofmultipleministriesinnaturalresourcemanagementandhowtoencourageconsolidation;(f)whichinterventionsaremosteffectivetoreducemalnutritionindifferentpartsofthecountry;and(g)howtomakethecostofmigrationmoreaffordableforpoorhouseholds.Throughoutthereporttheimportanceofunderlyingpoliticalconstraintstoprogresshavebeenidentified,andthispointstotheneedforcarefulpoliticaleconomyanalysispriortonewpoliciesandprojectsbeingdesigned,toensurepoliticallyfeasibleproposalsaredeveloped.

Nepal Systematic Country Diagnostic

Note:mostimportantprioritiesareinbold.

Table3Summaryofpriorities


NOTES


33 RajuandRajbhandhary,forthcoming34 Slide17.35 WorldBank2017a.36 RajuandRajbhandhary,forthcoming(slide15).37 WorldBank2016a.38 WorldBank2017b.39 AcemogluandRobinson2012.40 ThroughouttheSCD,NepaliscomparedtotheSouthAsia

average,andtoagroupof“structural”peers,countriesthatwereidentifiedashavingasimilarstructuretoNepal:landlocked,agrarian,non-resourcerich,populationof5millionto50million,andapercapitagrossnationalincomeofbetweenUS$600andUS$1,400.Thisincludesthefollowingcountries:Afghanistan,BurkinaFaso,theKyrgyzRepublic,Mali,Tajikistan,Uganda,andZimbabwe.Nepalissometimesalsocomparedtothelow-incomeaverage,andtheaverageforremittance-dependentcountries(countrieswithapopulationbetween5millionand50millionandremittancesofmorethan15percentoftheirGDP:ElSalvador,Haiti,Honduras,theKyrgyzRepublic,Lebanon,Tajikistan,andZimbabwe).TheFindMyFriendstoolwasusedtoperformthecomparisons.

41 WorldBank2017c.42 ThisandthenextthreeparagraphsdrawheavilyfromWorld

Bank(2017b).43 WorldGovernanceIndicators2016(slide20).44 AsiaFoundation2016,1.45 Adhikarietal.2014.46 Slide21andTheRecord,Nepal2017.47 MathiesonandBrown2014.48 AsiaFoundation2012.49 ThetwocastesareChettri(warriorclass)andBrahmans

(intellectualeliteandspiritualpreceptors).50 Khanal,SollewijnGelpke,andPrasadPyakurel2012.51 HighcastegroupsrefertoBrahminandChettriand

excludedgroupsrefertoDalitandMadhesi.DatafromPaudel(2016).

52 Paudel2016.53 Adhikarietal.2014.54 WorldBank2017d.55 ThediscussionofpoliticalcriminalityinBiratnagarin

Adhikarietal.(2014)providesanexampleofthis.56 AsiaFoundation2012.57 AsiaFoundation2012.58 Roubini(1990).59 ADB,DFID,andILO2009;MCC2014;ODI2014;World

Bank2015.60 WorldBank2017a.61 EnterpriseSurvey2013.62 WorldBank2016b.63 TheICORmeasuresthemarginalamountofinvestment

capitalnecessarytogenerateanadditionalunitofproduction.Overall,ahigherICORvalueindicatesthatinvestmentisinefficient.

64 WorldBank2017a.65 WorldBank2017a.66 WorldBank2017e.67 TwowavesofWorldBankEnterpriseSurveyswere

conductedin2008and2012.Thedatarevealthattheaveragefirmage(yearsofoperation)increasedfrom9.6to14.2betweenthetwosurveys.Thedifferenceinaverageage(4.6years)correspondswiththetimeelapsedbetween

[i] TheadultliteracyrateinKathmanduvalleywas83percentin2011comparedto43percentinthemid-Westernmountains(UNDP2014).

1 ItisestimatedthatathirdofeconomicactivityisconcentratedintheKathmanduValley,whichaccountsfor10percentofNepal’spopulation(NepalRastraBank2012).

2 WorldBank1964.3 Povertyandwelfarestatisticsarederivedfromaseriesof

NepalLivingStandardsSurveysconductedin1995/96,2003/04,and2010/11.Theyearsarereferredtoas1996,2004,and2011throughouttheSCD.

4 Slides1and2inonlinesupplementalannexfoundathttp://wrld.bg/q3Ew30iIbKs.

5 Seeslides59and60forselectedmacroeconomicindicatorsfrom2013to2020.

6 WorldBank2017a.7 WorldBank2016a;Shrestha2017a(slide4).8 Shrestha2017a(slide5).9 Shrestha(2017a)suggestsvillage-levelmigrationhas

apositiveeffectonlaborforceparticipationamonghouseholdswithamigrant(althoughlessthantheimpactonhouseholdswithanonmigrant).Phadera2016;LokshinandGlinskaya2009(slide6).

10 Slide7.11 Pattison2013.However,Shrestha(2017b)documentslower

mortalityratesamongmigrantsdespitehigherrisksofsometypesofmortalitysuchascardiacarrest.Thiscouldbeduetoself-selection(migrantsmaybemarginallyhealthierthannonmigrants),lowerexposuretosometypesofhealthriskpresentinNepal(suchastrafficaccidents),ormisreportingofdeaths.

12 WorldBank2016a.13 WorldDevelopmentIndicators(WDI).14 Slide8.15 Slides9and10.16 Ostrom2002.17 Slide11.18 Witteretal.2011;DFID2010(slide12).19 Slide13.20 Slide14;WorldBank2017a.21 WorldwideGovernanceIndicators(2015)reportedinWorld

Bank(2017b).22 WorldBank2017b.23 Slide15;WorldBank2016a.24 AsiaFoundation2012.25 WorldBank2017b.26 GovernmentofNepalNationalPlanningCommission2015.

Theearthquakeof1934killed10,000peopleanddestroyedmuchofNepal’sinfrastructure(WorldBank2017a).

27 Tiwari,Jacoby,andSkoufias2017;Shively2017(slide16).28 WorldBank2016a(slide16).29 Slide18.30 Anassetframeworkhasbeenusedtostructuretheactions

neededforNepaltotakeadvantageofopportunitiesforgrowthandpovertyreduction:(a)increasingthereturntohumancapitalbyaddressingtheconstraintstofirminvestmentandproductivity;(b)usingNepal’srichnaturalcapital—land,hydro,andforests—moreproductivelyandsustainably;and(c)enhancinghumancapitalandequitableaccesstoemploymentopportunities.ThisframeworkistakenfromBussoloandLopez-Calva(2014).

31 AcemogluandRobinson2012;WorldBank2017a.32 IOM2016.


Notes


104 WorldBank2016a;(slide35).105 Slide36.106 Slide37;andKiranetal.2013.107 Slide38.108 Slide40.109 WorldBank2012.110 Slide41;Milleretal.2017;ShresthaandCisse2017.111 Cunninghametal.2017;ShivelyandSununtnasuk2015;

Harris-Fryetal.2017;Andrews-TrevinoandGhosh2017.112 AlthoughbenchmarkingdatashowNepalperformingpoorly

oncooperationinemployer-employeerelations,hiringandfiringpractices,andflexibilityindeterminingwages,thereislittleevidencethatthisaffectstheabilityofindividualstoaccessjobsthatexist(RajuandRajbhandari,forthcoming)

113 WorldBank2017f.114 Eighty-sevenpercentofyouthmigrantsaremale;30

percentofmaleyouthhadmigratedforlabor,comparedto5percentoffemaleyouth(RajuandRajbhandary,forthcoming).

115 Bennett,Sijapati,andThapa2013.116 Slide39;WorldBank2017f.117 See,forexample,Bernardetal.(2014),andCamposetal.

(2015).118 Slide42.119 MinistryofHealthetal.2017.120 Grade-specificliteracytestscoresarelow,butbetterthan

thoseofseveralothercountries,andaveragescoresonthequalityoftheprimaryeducationsystemareatthesamelevelasstructuralpeers(slides43and44).

121 Lackofcomparabledataontestscoresathighergradeslimitscomparisonsofqualityatthesecondarylevel.ThelowpassratesintheSchoolLeavingCertificatearemoreanindicatorofinequitablescreeningathighergradesthanevidencethateducationqualityislow.

122 Slide45.123 WorldBank2017b;AsiaFoundation2012.124 Forexample,thepersonaldriverofanational-levelpolitician

securedfundingfortheDistrictEducationOfficesforreliefteachersandthenpersonallyselectedthereliefteacherstobehired(AsiaFoundation2012,19).

125 Slide48.126 Shively2017.127 Slides46and47.128 MinistryofForestsandSoilConservation2014.129 WorldBank,forthcoming.130 Slide49.131 Slide50.132 Slide18.133 Slide51.Inthecaseoftransfersfromfamilyandfriends,

thismayinpartreflecttheroleofremittances,althoughfamilyandfriendsarereliedononlymarginallymoreinNepalthaninothercomparatorcountrieswithmuchlowerratesofremittances.

134 Slide52.135 Slide53.136 RajuandRajbhandhary,forthcoming.137 IOM2016;(slide54).138 Slide55.139 Finscope(2014).140 Slide56.141 Shrestha2017b.142 Shrestha2017b.143 Slide56.144 Slide57.145 Slide58.146 WorldBank2016a.

thetwowavesofsurveys,indicatingthateithernonewfirmswereformedorthattheirrateofsurvivalisverylow.Thesameconclusionholdsformanufacturingcompanies,theaverageageofwhichincreasedfrom11.4yearsto15.6yearsbetweenthetwosurveys.Bothcasespointtosignificantbarriersfacedbynewentrants.

68 WorldBank2017a.69 Poudel2015.70 Samriddhi2016.71 WorldBank2017e.72 Slide23.73 WorldBank2017d;(slide24).74 WorldBank2016b75 WorldBank2017a;(slide25).76 SMEscomprisemorethan96percentofthetotal

industrialestablishment,contribute83percenttoindustrialemploymentgeneration,andshare80percentoftheindustrialsector’scontributiontonationalGDP(DahalandSharman.d.).

77 Slide26.78 Slide28.79 Slide27.80 AryalandHolden2011.81 Ratesoflandlessnessamongruralhouseholdsareverylow

intheHillsandMountains(3to4percent),andwhiletheyarehigherintheTarai(29percent),onlyathirdofthesehouseholdsareengagedinagriculturalwagelabor(Jacoby2017).TheGinicoefficientoflandownershipamongallruralhouseholdsisalsohigherintheTarai(0.65)thanintherestoftheNepal(0.47to0.51),butitdoesnotperformmuchworsethanothercountriesintheregion(Indiais0.74),Bangladeshis0.80),andSouthAsiadoesnotcomparepoorlytoglobalaverages.

82 WorldBank2017h.83 Slide29.84 DivanbeigiandSaliola2017.85 Slide30.86 EmranandShilpi2012;(slide31).87 ADB2005.88 WorldBank2016c.Inputuseisrelativelyhigh(4outof5

householdsusefertilizer),andwithafewexceptionsdonotshowlargegradientsacrossconsumptionquintiles;(slide32).

89 Pricetransmissionfromregional,central,andbordermarketstolocalmarketsisveryweak,suggestinglowmarketintegration(ShivelyandThapa2016).

90 ShivelyandThapa2016.91 Shrestha2012.92 In2014,priceinflationwas1.1percentagepointshigherasa

resultoftruckingsyndicatesintheNepalValley(Poudel2015).93 WorldBank2017h.94 MeeksandThompson2017.95 AlthoughthePowerPurchaseAgreementforChilimestarted

withRs3perunit,theprojecthadanescalationrateof8percentfor12years.Byyeareight,theratehadequaledthatofKhimti.Later,aftermuchoutcryfromotherinterestgroups,theescalationwasrevisedto6percentperyearforfourmoreyears.ChilimehasestablishedthreeseparatesubsidiarycompaniesandthereareconcernsthattheyarealsoreceivingbeneficialPowerPurchaseAgreementrates.

96 RaiandNeupane2017.97 ADB2005.98 North1991.99 Multi-StakeholderForestryProgramme,March2014.100 WorldBank2011.101 Slide33.102 WorldBank2016a;(slide34).103 Bennett,Sijapati,andThapa2013.



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