Nepal - Overview of economy

Nepal's place in the western imagination as a latter-day Shangri-La stems from its historical isolation, maintained until the overthrow of the Rana oligarchy (a small group of people who rule a nation) in 1951. Development planning commenced soon after, but half a century on, the country still struggles to free itself from its feudal legacy and temper the effects of an unpredictable global economy. Today, Nepal is one of the least developed countries in the world, with nearly half of its inhabitants living below the poverty line. Decentralization and privatization of government-run businesses have not worked for this agricultural nation; the 1989 trade-transit crisis with India, which caused severe commodity shortages, demonstrated how frail the economy was. Popular protests brought about multiparty democracy in 1990, and the reigning Hindu monarch was relegated to constitutional status. Ever since, recurring political instability culminating in a massacre within the royal family in June 2001 has hampered the implementation of economic reforms designed to relax trade regulations, attract foreign investment, and cut government expenditure.

Nepal's spectacular landscape, while attracting the tourism that both pays and pollutes the country, has been the major hindrance to its economic development. Rugged mountains cover over 80 percent of the land, isolating communities from each other and from the Kathmandu Valley. Trade, industrial growth, and foreign investment have been defeated by the terrain, despite significant efforts to improve the transport and communications infrastructure . As a landlocked nation, Nepal is heavily dependent on India economically. The industrial sector employs only 3 percent of the population, while the successful cottage industries that produce carpets and garments bring in up to 80 percent of foreign exchange earnings from countries other than India. Exports consist largely of primary produce sent to India, and trade with nations other than India is expanding. Imports include industrial and agricultural inputs such as machinery, fertilizers, petroleum products, and additional primary produce.

For now, agriculture constitutes most of Nepal's economy, with 81 percent of the population engaged in farming activities that account for over 40 percent of gross domestic product (GDP). The major food crops are rice, wheat, and maize, while sugar cane, oilseed, tobacco, and potatoes are other major cash crops . Despite government programs to introduce fertilizers and modern techniques, most farms still generate only enough produce to feed the farmer's family, with little or nothing left over to sell. Underemployment is high in the farming sector. The lack of irrigation facilities has left the average farmer dependent on the seasonal monsoon rains, and increased production has resulted mostly from the extension of arable land. The growth of a population heavily reliant on firewood has led to deforestation, which contributes to erosion and floods with serious consequences for communities in southern Nepal, India, and Bangladesh.

While efforts to develop the Nepalese economy systematically through the implementation of the govern-ment's 5-year plans have established a basic infrastructure, the benefits have been reaped by the urbanized, educated minority of Nepalese rather than by the rural poor. However, impoverished peasants and highly qualified urbanites alike emigrate and migrate within the country in search of better prospects, with serious implications for the economy. Foreign aid, which has supplied over 60 percent of development expenditure over the decades, has been underutilized and mismanaged. The increasing loan component of such aid has added to the country's foreign debt , which totaled US$1.5 billion in 1998.