Economic development

PRASHASAN The Nepalese Journal of Public Administration158
Factors Affecting Nepal’s Economic Development
Dr. Balkrishna Subedi*
Abstract
The development process of an economy mainly depends on the economic factors
such as natural resources, infrastructure, monetary and fiscal policy, agricultural
and industrial development and so on. But these factors are not sufficient for the
rapid economic development of a country. Development process is affected by
humanendowment,socio-culturalandpoliticalcondition,organizationalpattern,
and administrative system as well. It is important to know that these factors
are not independent but tend to reinforce and influence each other. However, a
detailed study in a particular factor is needed to suggest policy interventions in
which a particular country should pay attention for growth and prosperity.
1. Conceptual Framework
Economic development is a frequent slogan of the contemporary society especially
in the less developed countries. It is an integrated process in which all the sections of
the society are expected to actively participate and cooperate. It is not only concerned
with economic but also with many non-economic factors. Non-economic factors may
be scientific advancement, capacity to invest, number of children and household size.
Meanwhile the economic factors may be availability of economic resources, capital
formation and productive resources.
United Nations Research Institute for Social Development has developed a list of
economic and socio-demographic indicators of economic development. The economic
indicators include agricultural production, electricity consumption, foreign trade
including import and export and transport and services available to the society as a
whole as well as per capita. Under the socio-demographic indicators, infant mortality
rate, expectation of live birth, doctor-patients ratio, crude birth rate, literacy rate of
the society, available housing facilities and number of telephone users per thousand
population are included (cited in Raj, 1988). According to Prof. Cairncross-
“Development is not just a matter of having plenty of money but is it purely
an economic phenomenon. It embraces all aspects of social behavior the
establishment of law and order, scrupulousness in business dealings, including
withtherevenueauthorities,relationshipsbetweenthefamilyliteracy,familiarities
with mechanical gadgets and so on.”
Since economic development is closely associated with human endowment, social
attitudes, political condition and historical accidents, only economic attributes are not
sufficient for development. Political, psychological, social and cultural requirements
are equally important for development (Jhingan, 1986).
* Lecturer, Tribhuvan University. Email: subedibalkrishna3@gmail.com

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2. Nepal’s Development Scenario
Nepal started its planned development effort in 1956 and now has an experience
of 56 years. The country has achieved remarkable progress in the areas such as
road, irrigation, drinking water, information and communications, literacy and life
expectancy. However in terms of economic growth, the progress is not satisfactory. The
economic growth rate, a major indicator of economic development, is not at desired
level. Achieving a double digit growth rate has been a dream due to various underlying
impeding factors. Energy crisis has been a major constraint for economic development
affecting all aspects of life and economic activities. Given this background, this paper
discusses following economic and non-economic factors which affect the economic
development of Nepal.
3. Economic Factors
3.1 Natural Resources
Natural resources such as land, forest, minerals, climate and water resources are
determining factors in the pace of economic development. The composition of land
and its fertility, availability of minerals and water resources all have greater role in
development. Generally, a country which has sufficient natural resources will be
fortunate to develop its economy rapidly. For example, Australia has abundant land
leading to comparative advantage to produce commodities such as wool, mutton and
wheat. Similarly, Nepal can specialize in the utilization of water resources and can
earn a huge amount of foreign currency. Forest fire, uncontrolled grazing, export of
boulder, illegal collection and export of non timber forest products and use of forest
area for other purposes are seen frequently in forest sector (Three Year Plan, 2010/11
- 2012/13). Furthermore, the investment in mineral resource development in Nepal is
almost negligible. So, Nepal has failed to optimally utilize its natural resources.
3.2 Capital Formation
Capital formation is another important factor for development process. The process
of capital formation passes through different phases - saving, financial institution for
the mobilization of saving and investment in capital goods are basic requirements of
capital formation. Establishment of financial institutions in the remote and backward
areas to collect capital and to invest in productive sector through desired channels is an
urgent need of developing countries like Nepal. Establishment and expansion of such
institutions can help the development process through mobilizing financial resources.
It is also equally remarkable that one fourth of the population lives below poverty line
whose propensity to consume is high leading to almost nil saving. Even the affluent
segment of the society may not have strong motive to save and invest, particularly in
contemporary Nepal. Financial resources are either horded or invested in unproductive
sectors such as purchasing gold, jewelry or investing in real state. Furthermore, money
is frequently used to meet cultural and social requirement to maintain higher status
in the society. Unproductive consumption among affluent group has also created

constraints in saving and investment. So, to increase income and saving, government
should launch programs targeting lower income group in the society through saving
incentive mechanism.
Low interest rates on bank deposits, increase in consumption pattern, high rate of
inflation and limited financial access especially in rural areas are the major problems
in mobilizing savings towards productive channels.
3.3 Size of Market and Foreign Trade
The market size affects productivity since large size of markets allows firms to produce
in large scale. In the era of globalization, international market has become a substitute
for domestic market. There is emperical evidence showing that open trade is positively
associated with development. The perfect market competition both at domestic and
foreignmarketsareimportantfordrivingmarketefficientlyandthusenhancingbusiness
productivity by ensuring production of goods and services by the most efficient firms.
Recent Financial Crisis, 2008 is an evidence of high degree of interdependence of
the economies worldwide. Specialization and division of labor increases productivity.
This also helps large scale production. Both agricultural and industrial development
is impossible in the absence of division of labor and specialization. The market with
small size does not provide incentive to the division of labor, specialization and also to
the large scale production. Nepal is facing this problem due to small domestic market.
The share of export and import in total foreign trade remains 14.1 percent and 85.9
percent respectively (MoF, 2012). In the same way, trade balance is one of the major
challenges of development in Nepal. A large amount of foreign currency has been
needed to import consumer goods rather than it in investment and capital formation.
3.4 Physical Infrastructure
Extensive and efficient infrastructure base is an important requirement for ensuring
the effective functioning of an economy. It shapes spatial allocation of economic
activities and sectors of activities can develop in a particular economy. Well-developed
infrastructurereducestheeffectofdistancebetweenregions,integratingdomesticmarket
and connecting it at low cost to the markets in other countries and regions. Furthermore,
the quality and extensiveness of infrastructure significantly impacts economic growth
and reduces economic inequalities and poverty in a variety of ways. A well-developed
transport and communication infrastructure network and power supply is a basic
requirement for access to the core economic activities. Telecommunication network
helps for a rapid and free flow of information, which increases overall efficiency by
helping to ensure that business can communicate and decisions are made by economic
actors taking into account all available relevant information. Physical infrastructures
are mostly concentrated in urban area compared to rural area. So, effective modes
of transport such as roads, railways, ports and air transport enable entrepreneurs to
get their goods and services to market in secure and timely manner and facilitate the
movement of workers to the most suitable and profitable jobs. Furthermore, due to
lack of free flow of interregional transportation, apple in Jumla has damaged while we
are importing large quantities of such fruits from our neighboring countries. Regular

supply of electricity helps to run the business and factory regularly and contributes for
efficient production.
3.5 Agriculture Development
Agriculture sector contributes more than one third to Nepal’s GDP. More than two
thirds of its population depend on it for their employment. However, the government
has failed to ensure smooth supply of fertilizer, seed, pesticides, provide agricultural
loan, research and extension services, etc. to farmers. The agricultural research and
extension programs have so far failed to reach the large majority of farmers. High cost
of borrowing from financial institutions also affects agriculture. The agriculture sector
has not been modernized. Irrigation facilities are provided in a very limited area to
dampen agricultural production and productivity. Further, land reform has been made
an agenda of political parties only in the time of election to reach in power.
3.6 Industrial Development
Industries play an important role in the economic development of a country. Nepal
has low development of medium and large scale industries. The share of contribution
of this sector in GDP is 14 percent only. Even small scale industries are not well
developed due to lack of raw materials and insufficient financial resources. They are
also facing market competition due to the liberal policy adopted by the government.
This is the reason why more people are concentrated in agricultural sector though it is
less productive.
Poor industrial relation between the industrialist and labor is the main hindrance for
industrial development. Lack of clarity in legal provisions, unavailability of appropriate
technology for quality product, weak linkage with market and lack of confidence of
entrepreneurs are major problems faced by the industrial sector.
3.7 Monetary and Fiscal Policy
Themonetarypolicyofadevelopingcountryalsoplaysacrucialroleinthedevelopment
process by affecting the costs and availability of credit, by controlling for inflation and
maintaining equilibrium in the balance of payment. Monetary policy is an important
tool to maintain price stability by adjusting money demand and supply. An imbalance
between the two will reflect in the price level-inflation or deflation of money supply.
In the development process of an economy, the demand for money increases due to
monetization and an increase in agricultural and industrial production.
Furthermore, monetary policy can help to narrow down the balance of payments deficit
through high rate of interest. A higher interest rate may attract foreign investment and
may help in bridging the balance the payment gaps. A high interest rate policy is also
anti-inflationary by discouraging borrowing and investment for speculative motive
and in foreign currencies. It also promotes an allocation of scarce resources in more
productive channels.
Fiscal policy should be oriented towards the public spending in basic infrastructure to

generate more employment and income. However, the scenario of capital expenditure
has not increased as desired. Some construction works are done by the end of the fiscal
year only to comply the formality.
4. Non-economic Factors
4.1 Human Resources
Manpower is an active source of production and development. But the pace of
development depends on the quality, capacity and skills of existing manpower. Well
educated and trained people have better skills and higher efficiencies required for
production process. It is equally important to create qualified and trained manpower.
For this, investment on social services such as health, education and training is needed.
Due to lack of vocational education and training, Nepal’s human resource is not fully
fit for the rapid economic development.
Present globalizing economy requires well educated workers who are able to adapt with
changing environment and the evolving needs of the production system. Enhancing
secondary and tertiary enrollment rates as well as the quality of education is an urgent
need. The extent of staff training is also taken into consideration because of the
importance of vocational and continuous training which is neglected in our country.
Crude theoretical education alone cannot meet the contemporary needs.
Social attitude towards education seems to be unfriendly to economic development.
Purely academic education provides knowledge only for non-clerical jobs. It is
preferred to technical and vocational education in developing counties due to prejudice
against manual work. This is also the reason why developing countries are technically
backward and educational institution whether primary, secondary and tertiary are
regarded as the factory to produce unskilled and unemployed manpower. Nepal is not
an exception in this case.
4.2 Public Administration
Sound administrative system is another key requirement for the economic development
of a country. The weak administrative structure is a severe bottleneck for development.
Administrative procedure and excessive regulatory burdens hinder the investors to
invest. Official delay, red-tapes and corruption, dishonesty in dealing with public
contracts, lack of transparency and trust worthiness, and the political dependence of
the judicial system impose significant economic costs to business and slow down the
pace of development. Inefficient administration creates impediments to the sustainable
socio-economic development. Lack of effective mechanism to discourage irregularities
and the direct interference of political parties on administration are major problems
prevailing in administration. Furthermore, official delay and corruption may hinder
plan and project implementation dampening the pace of development in Nepal.
A stable, strong and efficient administrative mechanism is seemed equally important
for the implementation of development planning. Economist Lewis thinks about a
strong, competent and incorrupt administration as the first condition for the successful

planning. Most developing countries are facing difficulties in development due
to a lack of efficient and reformed administration. The institutional environment is
determined by the legal administrative framework within which individuals, firms
and governments interact to generate income and wealth in the economy. The role of
sound and fair institutional environment has become even more apparent during the
period of economic crisis, given the increasing role played by the state in the economy.
Improved public sectors delivery with good corporate governance will minimize costs
and support development process.
4.3 Entrepreneurship
Entrepreneurship is another economic factor of development. An entrepreneur can
organize and optimally allocate all other factors of production. He/she bears the risk
and uncertainty and earns profit from production. They have to forecast demand and
supply of products and other factors affecting price situation. Entrepreneurial ability
in developing countries is not much strong due to outdated technology, small size of
market, capital deficiency, lack of skilled and trained manpower and lack of sufficient
and quality transportation.
The growth of advanced economy such as Japan, United Kingdom and United States of
America is the result of entrepreneurial ability of producers in the respected countries.
Entrepreneurs could combine all other factors of production from domestic and
international markets and forward the production process in optimum scale and also
calculate demand more precisely. As a result, their economy was rapidly developed.
Nepalhaslowdevelopmentinentrepreneurship.Entrepreneursarenotinterestedtobear
high risk, seek short run projects, invest mostly in less productive portfolios and have
low level of confidence due to prolonged political transition.To develop entrepreneurial
ability in Nepal, government must facilitate entrepreneurs through several ways. There
should be created an appropriate environment to encourage entrepreneur to participate
in economic activities. To improve existing institutions, market imperfection should
be removed. Similarly, monopolistic institutions should be controlled and must create
competitive environment. Rules and regulations are introduced to run entrepreneurial
activities without disturbances. Similarly, skilled and qualified manpower such as
technicians, managers and administrators should be developed. Financial institutions
should be established to facilitate entrepreneurs.
4.4 Technology
Technology is another element for competition. The economy should adopt modern
technology available in the global market. The average cost of production will be
higher due to the technological backwardness. It also results low productivity of
capital and labor. Nepal is also facing problems of low productivity. Nepal is still
using outdated and orthodox technology especially in rural area which has made the
development process too slow and more costly. Even in urban areas, the producers use
highly labor-intensive technology due to lack of financial resources. So, the adaption
of modern technology in production is absolutely necessary for the betterment of the

economy. Foreign direct investment (FDI) plays an important role could be a major
source of foreign technology.
4.5 Geographical and Climatic Condition
Geographical and climatic condition is another economic factor of development. Every
country cannot produce all the required commodities due to geographical and climatic
conditions. For instance, Brazil has a suitable climatic and geographical condition for
the production of coffee while Bangladesh does so for jute. Due to spatial variation,
Nepal can specialize sheep farming in the Mountain region, horticulture and fruit
farming in the Hill region and food crops production in the Terai region.
4.6 Social Values and Attitudes
The development process largely depends on attitudes, norms, values and institutions
existing in the society. Such values and attitudes motivate the social behavior. Changes
in social attitudes, values and institutions depend on the perception of the society. On
the one hand, the dynamic society seeks new discoveries and inventions and ultimately
changes are witnessed. For this, economic freedom is equally important. Such freedom
provides people to involve and seek new economic activities. Industrial revolution is
an example of the dynamism of European society. On the other hand, rigid religious
attitudes do not support modern economic development. Religious beliefs hinder the
process of discoveries and inventions. Such attitudes and beliefs have no incentive
to work hard and get more return. Such a social system doesn’t seek higher living
standard and future security. Furthermore, such society has a deep belief on traditional
customs and pays a lot of time, energy and money during festivals and ceremonies.
Nepalese culture is also rooted in discriminations based on caste and gender. Gender
issues are interwoven systematically into the basic social structure of Nepalese society,
as are other cultural values.
Thetraditionalreligionandculturewhicharenotsupportablefordevelopmentshouldbe
modified accordingly. For this, education and training should be provided for favorable
environment of development. Therefore, social values, attitudes and institutions
should be motivated to create an environment and to prepare a base for economic
development. Better education and training help to increase knowledge which further
helps self-discipline, power to think rationally, to know new techniques of production
and to save and invest for the future. Such environment helps to create and promote
business activities. We have to provide technical and vocational education to Nepalese
youths to get better and technical jobs and high remuneration in international market.
4.7 Political Factors
Political factor is another key element for development. Political stability creates a
favourable condition for the implementation of plans and projects. The rapid economic
growth rate of the developed countries is one of the examples of political stability.
Foreign investors in developing countries do not feel security and at the same time lose
their confidence in the absence of investment friendly environment due to political

instability created by unstable government. Frequent changes in the policies and
programs due to unstable government adversely affect investment friendly climate.
Due to lack of sufficient capital for investment in the domestic market, most of our
resources are either unutilized or underutilized.
Therefore, a stable political environment is an important requirement for strong
and stable government. Such a government can provide an appropriate direction to
the development process by ensuring stable and sustainable economic policies and
programs. Such an environment can built up confidence and security of their investment
to the investors. This is the urgent need of the developing country like Nepal where we
have to use our natural resources properly.
5. Conclusion
Various factors are responsible for the rapid growth of an economy. Both economic and
non-economic factors directly and indirectly affect development process of a country.
If we optimally utilize our natural, human, financial and physical resources, double
digit growth rate is also plausible. For this, political commitment is equally important.
Policy makers must be confronted with management challenges. There should be
well-established democratic institutions and promotion of transparent, responsive,
participatory, inclusive and accountable governance system and systematic plan. A
mechanism should be in place to operationalize political consensus, policy consistency
and continuity in major national strategic issues among political parties. Furthermore,
investment friendly environment should be fostered in the priority sectors. The
high inflation should be controlled to stop the further deterioration of welfare. The
unemployment problem should be solved by increasing employment opportunities.
There should provide sufficient and reliable energy supply to tackle electricity crisis.
Furthermore, the development process must have a domestic base. People should
be conscious and committed for development. Foreign aid should not be accepted
as a major source of finance and should only be used as a supportive source. Both
internal motivation and resource utilization pattern should be made as the basic source
for sustainable economic development. Japan had developed its economy without
sufficient natural resources while Sri Lanka has developed the economy even in the
most conflict situation. Similarly, strong and competent administration and committed
government are considered as the basic requirements of rapid economic development
of Nepal.
References
Jhingan, M.L. (1986). International Economics. India: Konark Publishers Pvt. Ltd.
Ministry of Finance (2012). Economic Survey Fiscal Year (2011/2012), Government of Nepal.
National Planning Commission (2010) Three Year Plan Approach Paper (2010/11-2012/2013)
Government of Nepal.
Raj, H .(1988). Fundamentals of Demography. India: Surjeet Publications.
Subedi, B.K. (2006). An Introduction to Economic Development and Planning. Kathmandu:
Vidyarthi Pustak Bhandar.
World Economic Forum (2010). The Global Competitiveness Report 2010-2011: Geneva.

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