Beyond LDC Graduation: Transforming the Economy, Policies and Institutions

Nepal's economic development has taken a different path than a traditional one. Rather than
deindustrializing after a relative high level of income (a path followed by most of the current
developed nations), Nepal's deindustrialization happened before reaching the maximum levels of
productivity. As such, a smaller proportion of labor force is employed in the highly productive
industrial sector and a higher proportion of labor force in the less productive agriculture and
service sector. This chapter explains three different components that Nepal need to focus on after
graduating from LCD.

Economy:
Increase in factor productivity, land reformation, enhance self-sufficiency wherever possible, and
creating a level playing field in agriculture are some solutions to the inefficient, imperfect, and
unequally distributed sector. Similarly, manufacturing sector can be revitalized by correcting
market imperfections by limiting government interventions, creating policies that promote
import-substituting and export-promoting industries, and bridging the gaps in infrastructures
(especially to enhance supply which depends on transportation). Production of hydro energy with
a goal to replace the traditional means of energy fuels and expansion of tourism sector with high
emphasis on supply could do wonders for the economy. Sustained development in either of the
sector will not only strengthen that very sector but also allow other sectors to benefit from the
spill-over effects.

Economic Policies:
Prior to upgrading, Nepal, first, has a task to ensure that the existing public policies are run
smoothly and efficiently. It can do so by maximizing the level of spending and increasing
accountability on the projects that are being undertaken. The tax system could be modified in
order to provide incentives for new investors. With the monetary and financial policies, it should
aim to foster investment, diversifying trade channels, and easing the export processes while also
maintaining stability. Along with it, the pegged exchange rate could be reviewed in order to
strive for more competitiveness.

Institutions:
The roles of the formal and informal institutions must be clearly demarcated. The flow of
information should be efficient between the different levels. The government sector should
ensure fundamental rights and social protection to the people, the private sector should create
higher competition and a free market, and the cooperatives should aid in mobilizing resources
and channeling them locally. All of this should align with the vision of productive transformation
of the existing economy.

Submitted By:
Asim Kafle
Pratyush Khanal