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III. INTEGRATION MEASURES AND THEIR EFFECTIVENESS
[ III-A | III-B | III-C | III-D ]
C. Command and control vis-à-vis economic instruments
As in many developing countries, Nepal relies heavily on the "command and control" method for pollution control and environmental protection, although there have been few cases in which economic incentives have been used. Some government administered prices tend to encourage pollution, a glaring example of which is the subsidized price of diesel fuel.
It is generally recognized that the free play of market forces and correction of market failures will lead to a more rational and efficient allocation of resources and can contribute positively to environmental protection. Although market prices reflect economic costs, the ideal environmental pricing requires an accurate valuation of environmental degradation and imposition of corresponding additional taxes on those sources causing environmental damage. Such measures are, however, hard to implement because of information gaps as well as institutional and administrative constraints. That tends to suggest that blunt instruments or a combination of pricing and regulation may be more feasible and practical.
The liberal market-oriented economic policies being pursued by the government at present may also help to achieve the twin objectives of economic growth and environmental protection by: (a) removing market distortions arising from restrictive measures; and (b) creating more opportunities for trade and industrial expansion. That approach will gradually reduce the mounting pressure of the expanding population on the limited resource base in the rural areas, especially land and forests.
In order to ensure a positive impact on both growth and environment, reform measures should also be directed towards correcting the long-standing distortions and institutional weaknesses. For example, if trade reforms are implemented while resources continue to be underpriced, that could have negative impacts both on growth and the environment. At present, it appears that the government is looking for feasible options to deal with the long-standing issues of subsidies (fertilizers, and some petroleum and forest products) and pricing of scarce resources (e.g., water supply and energy) from a wider perspective of sustainable development as well as government budgetary constraints on further development of basic economic and social infrastructure (see box 1).
Box 1. Positive impacts of reforms on the non-agricultural sector
Small countries like Nepal cannot sustain an inward-looking, highly protected and restricted economy in view of their narrow resource base, obsolete technology, and limited domestic market for economies of scale and allocative efficiency. That is the reason for smaller countries having higher trade-to-GDP ratios than larger nations. The relatively more liberal economic policies pursued by the government in the past were constrained by the highly restricted and protected economy across the open border. With India opening up its own economy since the early 1990s, the economic liberalization process is facilitated in Nepal.
Licences are no longer required for the establishment, expansion and modernization of industrial enterprises except in the case of defence, public health and environment-related industries. Likewise, licences are not required for the import and export of items other than those banned or quantitatively restricted. In the financial sector, some of the major reforms are liberalization of the interest rate structure, provision of relatively free entry and exit of financial institutions, relaxation of directed credit programmes, a reduction in statutory cash reserves and liquidity requirements. Some of the notable reforms in the area of taxation have been simplification of custom tariffs and their reduction, the modification of the sales tax structure, the unification of differentiated income tax rates and their reduction, and the consolidation and abolition of tax rates. Implementation of full convertibility of the Nepalese currency on current account is a big step towards a liberalized foreign exchange regime. In fact, foreign exchange liberalization is a necessary condition for overall economic liberalization.
While it is too early to make any conclusive assessment of the impact of those reforms on the overall economy, some indications of positive impacts on the non-agricultural sector are now quite evident. The share of the non-agricultural sector, for example, in total GDP in real terms increased from 53 per cent in 1990/91 to 58 per cent in 1995/96 (provisional). The annual growth rate of the non-agricultural sector was generally higher in the 1990s than in the 1980s. Over the past seven to eight years (to January 1997), the government approved the establishment of 348 joint venture industries with foreign investment with an estimated total cost of Rs 45.6 billion. Likewise, the annual number of registered cottage and small industries increased from 932 in 1990/91 to 7,296 in 1995/96, and their estimated outlay increased from Rs 820 million to Rs 5.4 billion during the same period. The share of industrial production in total GDP recorded an increase from 6 per cent in 1990/91 to 8 per cent in 1995/96. However, the other components of the non-agricultural sector such as construction, trade, transport, finance, service etc., increased their share in total GDP from 45 to 49 per cent over the same period.
That data tends to indicate that, while there has been a growing interest in industrial investment including foreign investment, many of the registered small enterprises and approved joint ventures do not appear to have actually been established as yet. The renewal of the existing trade treaty with India in December 1996 with notable improvements, is likely to stimulate industrial investment since market size is not likely to be the major limitation to a wide range of industrial production in Nepal (other than those on the negative list, such as non-Nepalese, non-Indian brands alcoholic beverages, perfumes and cosmetics, cigarettes and tobacco). Such improvements include, among other things, the elimination of the controversial condition that Nepalese manufactured goods could enjoy access to the Indian market free of customs duties and quantitative restrictions only if such goods had been produced using at least 50 per cent Nepalese and/or Indian raw materials and labour.
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