Investigation into the impact of long-term political instability is prerequisite for developing a sustainable growth model. It necessitates finding out the link between low level of economic and social achievements, and political instability. There has been a great deal of literature on the macro-level analysis of the impact, but little micro-analysis. A recent study of Aisen Ari hints at a high level of political instability in Nepal, measured by the number of cabinet changes in comparison to other SAARC countries. Average growth rate in Nepal has been around 1-1½ percentage points during 1970 through 2000. The findings also show political instability accounting for roughly ½-¾ percentage point of the difference in average growth rates. Although Nepal is passing through inflationary trap, it is still lower than the regional average. The reason for little impact of potential sideeffects of political instability on inflation might be the exchange-rate peg with the Indian rupee.

Nepal’s climate, natural beauty, declining risk profile and huge market potential with two of the world’s largest economies, China and India, are constrained by weak investment promotion programmes coupled with corrupt administrative practices and conservative business attitude. There are inadequate linkages with national firms, and absence of long-term plans to increase competitiveness. Other constraints include underdeveloped infrastructure, weak financial sector and capital market, illiteracy, and low level of human resource development.

People’s sovereignty does not guarantee empowerment. It is rather an opportunity and means to effectively participate and share authority. The inter-linkages between democracy and empowerment need to be established and efforts to identify factors constraining private investment identified. The revival of the private sector is essential to support growth and empower people. It widens the access to growth opportunities and opens up new avenues for equitable sharing of benefits of growth.

Although the seven parties agreed on broad-based socio-economic reforms in the comprehensive peace accord and interim constitution, their interpretation, viability, and likely impact have been left out. The confusion is created when political parties do not focus on agreed priorities during their rallies and speeches. The stumbling block to growth is high level of inequality. Studies show negative correlation between average growth rate and measures of inequality. Therefore, political parties’ major aim should be income distribution/ redistribution. Nepal needs to address income gaps between the have and the have-nots. Capacity building programmes are advisable for markets for their better functioning and expansion of reforms in governance. Some areas that could contribute to reduction in inequality are expansion of financial markets, raising the incomes of the poorest through labour market reforms, and distributive fiscal policy.

We are fortunate in that the economy is supported by the poor themselves through remittances. The gross foreign reserve has gone up to $3 billion in June 20, 2008. In Nepal, about 35 per cent of all household income come from remittances. This suggests the need for enhancing professionalism to manage remittances for priority sector investment.The study shows that a 10 per cent increase in share of international migrants can lead to a 1.6 per cent decline in the share of country’s people living on less than a dollar a day. Nepal’s priority should be to investigate the impact of remittance on poverty and inequality and seek technical assistance in sustaining remittance flow by proper identifation of investment areas.

Under-utilisation of resources and reduced returns from investment are likely when legal measures fail to address corruption. In many countries, corruption is found to have encouraged investment only where there is short-term gain. This actually destroys the structure and pattern of economic development by eroding the efficiency of the economy. In general, since corruption discourages investment and obstructs development of private sector, it delays completion of projects on time.

In Nepal, fiscal discipline is often questioned in infrastructure projects but no proper investigation has been carried out in terms of cost and benefits of such projects. World Bank study on Indonesia can be replicated in Nepal. According to the WB, in Indonesia, 24 per cent funds is lost through corruption in road construction. The problem with only physical and financial audit is that it cannot precisely identify the extent of graft.This necessitates research in corruption. Since firms in LDCs lack capability, market economy does not always work unless our own market is controlled and protected by playing within the framework of free market game. The bottom-line is to make local beneficiaries the principal actors of development planning and execution.

Pyakuryal is professor of Economics, TU