Dependence on foreign aid suggests that Nepal's economy still has a long way to go in attaining self-reliance as government revenues go mostly towards meeting consumption, which doesn't leave much for investment. The share of regular expenditure in the GDP is almost double to that of capital expenditure, with foreign aid financing most of the latter. Current saving levels are as high as 30 per cent of GDP but stagnant investment undermines growth, leaving little resources to meet the debt burden. Nepal's external public debt fell sharply from half of GDP in 2002 to 30 per cent in 2007. But external debt service (as per cent of exports of goods and non-food services) climbed from eight to 11 per cent, reflecting a crisis-ridden export sector and overall economic languor.
Aid can complement national poverty reduction and growth strategies in low-income countries, but there are grounds to believe that this may not be so. The market economy advocates claim that the receipt of concessional resources delays self-reliance on the part of the recipient nation, substitutes for domestic saving, fosters dirigisme and postpones much needed policy reforms.
Left leaning economists believe that aid perpetuates dependency, props up authoritarian regimes and perverts domestic development. Despite these extreme views 'Does aid work?' may be considered largely an empirical question. Studies by aid agencies conclude that most aid does indeed 'work'. Evaluations by the World Bank, the ADB and the Inter-American Development Bank for the period 1970-2000 show that a majority of their loans fully met their objectives.
A three-member team made up of Bishwambher Pyakuryal, Dadhi Adhikari and Dipendra Purush Dhakal has made an attempt to study the Nepal experience by updating their background document, Nepal's Foreign Aid Policy 2002.
Is Foreign Aid Working? An analysis of aid effectiveness and growth complies past evidence and raises pertinent issues in the domestic context. Based on a time series data from 1975-1994, Bikas Joshi's 1996 research reveals that foreign aid contributed positively to growth in Nepal. Another study by World Bank economist David Dollar suggests that aid volumes to Nepal were insignificant to trigger any significant positive change in per capita GDP largely due to a weak domestic policy environment.
It is unlikely that Nepal would have been able to achieve its current income levels in the absence of physical infrastructure, financed mostly by foreign aid. These public goods contributed in overcoming geographical barriers, establishing markets, and provided communication, drinking water, education, energy, health, and transport facilities. Skills and technology constitute hidden externalities aiding national capabilities.
However, domestic economic mismanagement aggravates aid dependency. Business principles are often subservient to personal, group, and party interests in Nepal's case. Under both the Panchayat (1960-85) and liberalisation (after 1985) domestic economic mismanagement bred externally-driven solutions often at high cost to the public exchequer as well as compromised domestic policy-making space.
For instance, state-owned banks resorted to politically-motivated lending, misallocating scarce resources while making its main goal of ensuring financial inclusion difficult to attain. Unwarranted government interference in the industrial sector undermined the performance of public enterprises, culminating in stunted industrialisation. A mix of feudal land tenure system and low investments slowed the modernisation of the largely traditional agricultural sector.
Unless sound business principles are followed, it won't matter which model of economic reform is adopted. However, greater domestic ownership can generate wealth, empower excluded sections of the population, and reduce deprivation as the successes of community forestry, primary education and adult literacy, and rural microfinance attest.
With their rich experience as Nepal's prominent economists and policy makers, the authors identify leading issues in Nepal's foreign aid. Despite the sometimes plodding text and desultory arguments, this is a subject that matters greatly to make the promised 'economic revolution' a reality.