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Stuck in first gear. Why economic governance is critical to unlocking Nepal’s potential

Nepal has huge potential, but political instability and institutional weaknesses have restricted economic growth for over a decade. Palladium’s Economic Policy Incubator is working with the Nepali government, businesses and civil society to catalyse inclusive growth.

With smarter leadership and management of the economy, the future is bright for the Himalayan nation.

The economic policy landscape in Nepal
Despite emerging from conflict in 2006 Nepal’s economic performance has remained poor: growth since the end of the conflict has averaged at 4%, lower than the rate seen in the 1990s. Nepal has significant opportunities for hydropower, tourism, manufacturing and trade with India, but the country has been de-industrialising and larger and larger numbers of Nepali people have to travel abroad for the best chance of making a living for their families. At the heart of this poor economic performance is political instability and a number of other interlocking, cross-cutting constraints; including high costs of transportation, poor access to reliable electricity and a challenging investment climate. The government of Nepal has been unable to provide leadership for the economy, instead beset by electoral turnover and coordination failures.

How can you stimulate transformative and inclusive growth?
A bright and sustainable future for the country and for Nepali people depends on more effective economic policy, underpinned by more capable institutions. The Economic Policy Incubator (EPI) takes a politically smart approach to identifying the most appropriate areas for intervention, and works adaptively to strengthen policies that boost Nepal’s economic growth.

What does that mean?! In essence, EPI works with the Nepali government, businesses and civil society to amend, change or introduce policies that have the greatest potential to boost the economy. Central to EPI’s philosophy is inclusivity – growth must benefit the greatest number of people possible.

EPI is prioritising a number of activities, including working to help improve the technical quality of policies, regulations, and procedures; supporting an improved policy process by convening dialogue and engagement between key stakeholders; and, enhancing the capacity and structure of government institutions to ensure improved economic governance in the future.

This approach is already making an impact. A number of acts and amendments have been passed which directly support economic growth in Nepal. Including the Special Economic Zones Act, the Companies Act, and the Industrial Enterprises Act, all passed by parliament in our first year. We are also playing a central role in the development of Nepal’s first cohort of Special Economic Zones by supporting policy development and the technical capacity of a number of government agencies involved in the initiative – for example the Special Economic Zones Authority. Our ongoing work also includes supporting the establishment of e-payment mechanisms and supporting e-commerce in general, as well as facilitating stronger management of economic corridors.

Nepal has huge potential, but political instability and institutional weaknesses have restricted economic growth for over a decade. (Flickr - ow.ly/RZys30cKxmb)

Being flexible and led by local insight is essential to finding the right opportunities for reform
EPI has a highly experienced Nepali team with extensive experience working in policy development and private sector growth, and who understand which solutions are most appropriate to the nuances of the Nepali context. This local insight ensures that practical and realistic decisions can be taken about which opportunities to pursue, and which to leave alone. By working in an adaptive and flexible way, we can seize quickly on emerging opportunities and choose to scale up activities that have proven their potential for impact.

Palladium has been at the forefront of the drive towards adaptive programming, doing development differently, and thinking and working politically, and we are therefore able to effectively apply these ideas in practice. This is particularly important in the context of Nepal where the normal operational environment has been unpredictable, volatile and has had a high political turnover. We adjust the nature and scale of our activities in direct response to our understanding of what works and what doesn’t.

The decade to come
As Nepal completes its transition to a federal structure, the increased political stability and stronger powers for regional development means stronger foundations for economic development. If the country can build on these with stronger and smarter leadership and management of the economy – as well as harnessing the dynamism of its people – the future is bright for the Himalayan nation.