Impact of Policy Reforms on Manufacturing Growth in Nepal

Abstract

Until the mid-1980s, there was a very popular view in Nepal, as in many other developing economies, that import substitution (IS) policy improves terms of trade, reduces dependence on external markets, and creates employment opportunities. Thus, IS policy was given top priority. However, it failed to sustain economic development, and in fact, reliance on external markets increased due to growing need for capital goods and intermediate inputs. Furthermore, the capital intensive nature of the IS industries resulted in slow growth in employment opportunities. By the mid-1980s, it was obvious that an inward-oriented development policy had produced recession in the economy. Thus, reforms were introduced in 1986-87 but they moved very slowly at the beginning due to the country's land-locked position and open border with India. If trade and investment policies in Nepal were more liberal than those in India, massive smuggling would drain Nepal's foreign exchange reserves. If Nepal were to provide generous export incentives, Indian goods would be reexported. So to control smuggling and maintain an economic balance, Nepal had to delay pursuit of a massive liberalization until India liberalized its policy environment in the early 1990s. This article examines the impact of reforms on the manufacturing sector of Nepal, a least-developed land-locked country.' The first section briefly describes the historical setting and is fol-