Economic Setting
Nepal as a nation state has a history of more than 3000 years. It ranks seventeenth among the old states in the world. Its present shape, however, is a result of the 1816 treaty with British India. The country was ruled by feudal lords and aristocrats till the installation of democracy in 1950. From 1950 till today, democracy could not be stabilised due to the institutionally ambitious and expensive monarchy and the ambiguous role of Nepal's close foreign allies who remained supportive of traditional forces because of the China factor. Of course, Nepal gained in terms of external assistance, but it had to bear a high cost due to political instability which led to inadequate socio-economic transformations unable to realise the twin goals of a modern society i.e. higher growth rate and distributive justice (Sharma, 1998a).

The Nepalese society today is economically highly fragmented, unequal and distorted (Sharma, 1998a, 2000b and 2004). This is happening amidst a resource base which is considered strong and viable by any indicators of natural, cultural and human wealth. The capital base remained highly volatile due to rulers' keeping their assets abroad. This led to serious economic effects resulting in low degree of industrialisation and agricultural transformation, massive unemployment, deepening poverty, social discrimination and deprivation, inequality and external dependence.

Even after almost 50 years of planned development, the country is unable to overcome structural deficiency, rigidity and development disparity (Shrestha, 1998). Instead, major areas and population of the country are kept outside the market net. The eventual consequence for the economy has been the low resource efficiency and productivity all over the country leading to absolute poverty, income disparity and unemployment as well as low income and saving. This has had a negative effect on investment and growth. The country today is economically in a low equilibrium population trap, which is undermining the smooth transition of the so-called traditional economy to a modern and diversified structure suitable for the competitive world under the WTO framework (World Bank, 2004).

The intent of this paper, therefore, is to present an overview of the Nepalese economy which is joining the WTO and is waiting for prosperity and justice required for dynamic social changes without discrimination, deprivation and cultural fragmentation- the genesis of the current crisis. The paper, for this purpose, is split into various sections. Let us discuss the current state of the economy first.

Institutional Framework and Resource Position
The Nepalese economy is determined by forces both at home and abroad. The factors at home relate to its geography, history, culture, traditions and their impact on institutional and legal arrangements which may or may not be friendly to economic development. The external factors comprise Nepal's economic and cultural relations with the outside world that have been growing at a faster pace after 1950 (Sharma, 1998c), the year of democratic innovation. Particularly, years like 1955, 1956, 1959 and 1961 are noteworthy. 1955 is the year in which Nepal joined the United Nations. In the year 1956, Nepal initiated the process of modern development by way of introducing planning exercises with the support of foreign assistance. It also established a central bank, the Nepal Rastra Bank, regulating domestic currency as well as foreign exchange in the same year. A national university, the Tribhuvan University, was set up in 1959. The most significant year was 1961 when Nepal became a member of IMF and World Bank, but failed to join GATT, a fact it regretted when India imposed trade sanctions in 1989.

The relations with China in the north, however, have not been bitter after 1959 (Sharma 1998c). Steps promoting economic cooperation, helping capital formation and technology transfer, led to the impressive growth of modern sectors, mainly concentrated in urban and suburban areas which are in direct and impressive contact with the international world, leaving rural areas in isolation. It was also felt that the so-called modern steps helped reduce trade dependency on India, which was almost 100 per cent until the early 1960s. Instead, Nepal was efficient in diverting its trade transactions towards other countries. What has emerged today is that Nepal faces equally huge deficits in trade with India and other countries (Sharma 2000a). As a consequence, linkages of income and employment occurred at home. Besides, trade deficits have also resulted in foreign exchange gap, the mitigation of which required either the export of services or the inflow of official as well as private capital. In a situation where Nepal has a weak export base, dependence on foreign capital is substantially high (Sharma, 1998b).

The situation could have been made favourable by raising rates of participation in the development of all kinds of resources all over the country (Sharma, 2004), given the economically viable geographical and cultural heritage and diversities in human and other natural resources. By way of harnessing the stock of this wealth, Nepal could have strengthened its economic position long ago as was done by other nations like Korea, China, and India, who initiated the dynamic process of development in the same period.

Indeed, Nepal (see Sharma, 2002) has an area of 147181sq. km. It is split into three zones; namely, hill, mountain and terai. The altitude of the Himalayan range (includes 35 per cent of the land area where 7.3 per cent of the population lives) varies between 4877-8848 meters. This range includes the top mountains like Mount Everest and Kanchan Jangha which are, respectively, the first and third highest in the world. The range covers many such beautiful mountains, which have been the perpetual source of river flows, spring water and snowfalls. The economic viability of this zone is explicitly demonstrated when attraction is provided to tourists and wild life, and impetus for growth is given to agriculture and industry. It is helpful in power generation and healthy manpower supply. The hilly region covers 42 per cent land area where 46 per cent of the population resides. Its height ranges between 610-4877 meters. This range includes many valleys, green forests and fertile lands because of which the population density of this zone is high. It is a land scarce region, and, hence, intensive farming practices prevail here. This region is rich in vegetation and cultural diversities and is suitable for cultivation, trekking and tourism. The Terai region is conceded as the most viable region for cultivation and, therefore, is a granary for the country. It is also rich in biodiversity and cultural heritage. Lumbini, the birthplace of Buddha, is a renowned place for tourism. There are a number of national parks in this range. Nepal's human resource position is adequate considering that Nepal gets remittances to the tune of almost one billion dollars (informally estimated).

Nepal has both natural and human resources. What is required is an efficient harnessing of these resources. Efforts in this direction have been made in the past, through a planned process of development. However, because of policy biases towards macroeconomic adjustment (Sharma, 2004) and the inability of the government to harness and manage resources properly, and also due to the rapidly growing population (at the rate of more than 2.2 per cent annually), the situation has deteriorated. There is rapid depletion of natural resources on which households have depended for centuries for their livelihood. In the absence of appropriate micro-level programs for rehabilitation poverty has increased. There is substantial population pressure on the urban centres, causing many other distortions and anomalies. Nepal also exports poverty historically through emigration. As there is low attraction at home, skilled and efficient manpower is repatriated, making the economy further inefficient. In addition, as a consequence of a defective public policy of aggressive liberalisation and privatisation after 1990, income disparity under the feudal social setup has been further enhanced. All these factors helped fuel the Maoist movement.

Data (see World Bank, 2004; CBS, 2002 and 1997; ICIMOD, 1997; MOF, 2003) reveals that Nepal's population is growing at the rate of 2.2 per cent annually and it has now exceeded 24 million. The growth rate of GDP in 2002, however, remained negative. In 2003, it was positive but 2.3 per cent only. Compared to a population growth rate of 2.2 per cent, the growth of GDP in real per capita term remained only 0.1 per cent. The poverty ratio over decades has been constant at 42 per cent. The ratio of urban population in 2001 was only 13 per cent. The literacy rate is around 55 per cent. While the gross domestic savings to GDP ratio in 2003 was only 11.3 per cent, the ratio for investment for the same year was found to be 26.1 per cent. The savings gap, thus, is almost 15 per cent. This gap is met through foreign assistance in which the loan component is as high as almost 70 per cent. The foreign debt-GDP ratio accounts more than 50 per cent. The debt repayment ratio is around 5 per cent of GDP (Sharma, 1998b).

Agriculture is still a dominant sector of the economy, which contributes 40 per cent to the GDP. Given the ratio of population dependant upon agriculture- more than 75 per cent- and the growth performance of it (2.1 per cent in 2003), it is revealed that this large sector of the economy where poverty is concentrated is yet to be modernised. The situation would have been neutralised had the industrial sector grown faster. Unfortunately, this sector too grew by 2.3 per cent in 2003. It resulted in 14 per cent of unemployment and 50 per cent of under-employment. Again, inequality measured by GINI coefficient in a decade increased from 0.31 to 0.36 (CBS, 1997) with its aggravating effect on poverty ratio, which has been 42 per cent for decades.

The situation is further worsened by the urban and India-centric policy of the government (Sharma, 1998c and Khatri, 1997) which is market friendly in character. The urban character is demonstrated by per-capita income for rural Nepal, which is half of NRs. 25,000 in Kathmandu (CBS, 1997). It is also evident from the concentration of developmental infrastructure such as electricity, communications, roads and health services in urban areas, which are the established commercial centres (Sharma, 2004). This is further worsened by the historically unjust economic relations based on feudal practices which favour a few of the urban elite, the already privileged, development brokers and those who are wealthy in the rural areas. It is held:

'…….Anti-poor, biased distribution of productive assets like land, ownership of enterprises, lending and investment of financial institutions, employment and self-employment opportunities, urban centric development activities, without proper distribution across regions, etc, on the one hand, and the flat rate of land tax, rebates to bigger investment, collateral based credit system, absence of protection to cottage and small industries employing indigenous labour, etc, on the other, are the defective traditions……..Similarly, urban biased policies in energy, transportation and communication, health and education, banking, finance, insurance and industries have left the resources oi [the] countryside unused, inefficiently used, non-monetised….The situation is further aggravated by the corruption at the government level whose policies have been too unrealistic in view of the country's reality, as they favour those who have inherited huge property'. (Sharma, 2000b, pp.20-21)

Government policy is India-centric by virtue of Nepal's 1950 treaty with India, which is committed to national treatment of citizens of each nation. Due to this and also since Nepal lags behind the technologically and institutionally stronger India, shocks in any forms- natural, institutional, economic, technological or market related- in India are easily transmitted to Nepal, which is unable to bear the burden of an open but unrestricted border and full convertibility of the Indian currency. The compulsion of the 1950 treaty with India is that Nepal cannot remain independent of Indian policy. Nepal must passively adjust its major macroeconomic policies including fiscal, monetary, trade, labour, investment, exchange rates, price, etc, in view of the policy choices in India. This implies that Nepal cannot independently apply any policy and use discretionary power as per local needs. Together with a feudal legacy on all fronts Nepal has failed to achieve the planned objectives of poverty reduction, higher growth rate, satisfactory level of employment, favourable balance of payments, etc. Nepal's chronic problems at this juncture are poverty (42 per cent of the population is below poverty line), under-employment (50 per cent of the labour force) and unemployment (14 per cent of the labour force growing by 300 thousand a year). Of these, the huge and fast growing trade deficit (total trade deficit in a year is more than 15 per cent of GDP, which amounts to NRs. 80 billion, and deficit with India alone is NRs. 26 billion) may also be the cause for the other two, as more imports of goods and services imply loss of employment and income with negative repercussions on savings and investment. India's abnormal profit motive reflected in trade negotiations and tariff and non-tariff barriers imposed infrequently upon Nepal is also causing heavy trade deficit and hence, damage to the Nepalese economy.

The eventual effects of these losses are found in the Maoist insurgency, which erupted eight years back in 1996 and continues in violent disruptions. There is a huge loss of social opportunities, life and property. Social opportunities are lost when more development fund in the budget is diverted towards military expenditure with direct negative impact on social expenditure or opportunities. Some ten thousand people have already died and physical infrastructure has been damaged. The loss of property is yet to be estimated. Speculation is that Nepal directly lost more than five billion NRs. worth of public property. The losses in terms of lower growth rates of income and employment, their further aggravating effects on trade deficit, repatriation of human resource and capital abroad and the cycle of downswing in economic activities reflected in declining values of income and employment multipliers have not been estimated so far.

Scope of Economic Modernisation
The role of natural, social and cultural endowments in economic development needs not be reiterated. Given the stock of national wealth in Nepal, what is theoretically taken for granted is that resources are not the constraining factors at least in this technology-driven world where the resource efficiency as an essential condition for growth may be sufficiently enhanced through the application of recent know how in all fields of organisation, management, production, supply and marketing. If initial conditions are the necessary condition for accelerating the process of economic growth, the sufficient conditions, undoubtedly, are access to market and expansion of institutional capabilities. The climate for higher growth and development is deteriorating. This weakness is felt even more when the country is becoming market friendly and committed to liberalisation and privatisation. Nepal, at present, is confronted with high aspirations from newly acquired membership of WTO and the primitive state of the commodity and service sectors, which are less exposed to corporate culture.

Institutionally, culturally and technologically, Nepal, however, lags much behind other countries in competitive supply. The reason is that, on the one hand, it is in the list of least developed countries, as indicated by indexes, including human development, growth rate, poverty, inflow of FDI, etc. On the other hand, its dominant sector of the economy, namely agriculture, is traditional. It is not competent even in manufacturing and service related activities. Studies conclude that Nepalese labour is 20 per cent less efficient than Bangladeshi labour. Their efficiency is not comparable to their Indian counterpart, as witnessed by their replacement by Indians in the Nepalese labour market, whether it is in construction, manufacturing or in any other skill-based activities. Even in the unskilled category, Indian labour is hard working. The conclusion is that in order to exploit growing opportunities of entering into the global market and to compete with MNCs at home, Nepal needs structural overhauling. It is getting assurances as well as external assistance from donors, individually and multilaterally, in this direction.

Conclusion
Nepal, of course, has a large opportunity for economic development, given economically viable resource endowments. Efforts in this regard have been made in the past four or more decades, beginning in the 1950s. It, however, appears that little is realised in terms of achievements, in sectoral performance or indicators of development affecting quality of life and social transformation. This situation is worsening. This is mainly because of the defective economic policies of the government. While the role of a welfare state and hence the ground for public intervention has been substantially reduced, the tradition bound socio-economic structure based on deep-rooted feudal institutions is benefiting only a few. A majority of the people, therefore, are deprived of social opportunities that could make them economically well off. Again, when economic power backs political power, politics is centred in the hand of already well to do families. This cycle is repeated when economic and political powers re-enforce each other and the rich but resourceful people resist any fundamental change against their compounded interests. The society in Nepal, therefore, is experiencing excessive negative shocks because of which it is losing active dynamism, and hence progress is slow. Besides, the present governance structure is highly centralised keeping many parts of the country alienated from power centres. Subsequently, poverty, discrimination, deprivation and inequality across family and regions are substantiated and sustained. The seeds of crisis are now exploding in the form of the Maoist insurgency which effects the present as well as the future of the Nepalese economy and society. The crisis of governance and economy needs to be tackled with vision.

(Dr Gunanidhi Sharma is professor of Economics at Tribhuvan University, Kathmandu and has written extensively on the Nepalese economy).

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