Barriers to Growth

Poverty can be shown by Human Poverty Index (HPI: a long and healthy life, knowledge and a decent standard of living)

Poverty Cycle

• Low income ® Low savings ® Low investment ® Low incomes

Nepal is having this poverty cycle in the economy  due to low income. 69% of population is living on less than $2 a day. This will cause people save less, invest less, and earn less eventually.

Institutional and Political Factors

1. Ineffective taxation structures: physical problems or simply data information problems (ex: poor records of the population)
2. Lack of property rights: property allocated on traditional or tribal grounds or ownership. This prevents trade of FOP between ownerships.
3. Political instability: There will be an unwillingness to engage in capital investment.
4. Corruption: a barrier for overseas firms investing in an economy
5. Unequal distribution of income
6. Formal and informal markets: In informal markets, no money is exchanged and economic activity goes unrecorded.
7. Lack of infrastructure: Can be known from the data of electricity use, roads, access to sanitation, fixed lines and mobile telephones, illiteracy total, mortality rates, and child malnutrition.

International Trade Barriers

Over-dependence on primary products

After the prices of primary goods fall, the developing countries have to export ever greater quantities of primary products to be able to import the same quantity of imported goods.

Low income elasticity of demand for primary products.

Violently fluctuating prices of primary goods. (Elastic)

Increased trade between developed countries

Consequences of adverse terms of trade

People need to sell more just to earn the same amount as they did in previous years, ignoring any decline in the value of their domestic currency.

Consequences of a narrow range of exports

Overproduction, failure to get all producers to join, storage of some commodities is difficult, and floor prices are too high and encourage overproduction.

Protectionism in international trade

• Strict protection policies in the developed economies in order to stop cheaper imports coming in from developing economies.

International Financial barriers

1. Indebtedness: After the first oil-crisis in 1973-74, developing countries’ debts suddenly rose. In the 1980s, those countries borrowed from US government and immediately interest rates moved upwards. The developing countries found their debt risen in real value. (Increased interest rates, increased value of the dollar, and the recession in the developed world)

To solve debt crisis. 1. Attempt to expand GDP faster than debt ratio. 2. Structural adjustment programmes can be accepted. 3. The richer nations could write-off debts and import more so that they can boost developed world trade.

1. Non-convertible currencies: mainly apply to developing countries whose exchange rates are fixed, rather than floating. As the fixed rate is usually greater than the free market equilibrium rate, the exchange rates tend to be overvalued. Therefore it makes exports more expensive.
2. Capital flight: Borrowed money used not to repay debts, but to put into stocks and shares and property. This occur due to fear of devaluation, highrates of inflation, a low real rate of interest, and a poor domestic investment prospect.

Social and Cultural Factors

1. Religion
2. Culture
3. Tradition
4. Gender issues

There exist a lot of barriers to economic growth in Nepal. Unequal distribution of income is one of them. Country’s 10% of the population takes 50% of the wealth, and the bottom 40% takes 10%. Also, due to lack of property rights, land ownership in Nepal has been extremely limited. Limited access to new farming technologies, inputs and extension services causes productivity levels remain low. It eventually prevents trade of land and agricultural goods. According to the data from 2003, 86%  of 24.7 million population in Nepal resided in the rural areas. It suggests their dependence on agriculture. 80.2% of the labour force is employed in this sector, but the industrial sector is still on its progress. Besides, lack of infrastructure can be seen from the following data: access to improves sanitation (35%) and literacy rate (49% all adults). Most households have little or no access to basic social services such as primary health care, education, clean drinking water and sanitation services. 85 % of Nepalese don’t have health access. The barriers include political instability; poverty and lack of economic growth contributed to political unrest and violence. A Moist rebellion that began in 1996 killed more than 14,000 Nepalese and about 600,000 have been internally displaces or made homeless. Fighting occurred largely in rural areas, affecting agriculture. Though a peace accord was signed between the Government and the Maoists, it still remains a fragile issue. This instability may cause an unwillingness to engage in capital investment.

Listed above, several barriers have been slowing down the economic growth in Nepal. Since the country is already in poverty cycle, it would be difficult to raise the productivity level. Considering influence from each barrier, the biggest barrier would be over-dependence on agriculture. It is unlikely for peasants to attempt getting education or to invest on FOP. Also, due to lack of property rights, people barely have no incentive to be productive.

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