The agricultural revolution played a crucial role in the global economic leap forward. Theodore William Schultz, an American agricultural economist and chairman of the University of Chicago Department of Economics (who was awarded the Nobel Memorial Prize in 1979), and other economic historians have concluded that a revolution in the primary sector (agriculture) is key to economic advancement. This conclusion was based on global economic history from the 16th and 17th centuries onward.
The agricultural revolution contributed to robust economic growth, fostering the development of other sectors in the United Kingdom, Europe, the United States and even India. In the 1960s, during Indira Gandhi’s leadership in India, agricultural scientists Dr. Norman Borlaug and Dr. M.S. Swaminathan spearheaded the Green Revolution, initially implemented in Punjab and later extended to Haryana and Andhra Pradesh. Until the 1970s, the United States provided food aid to India through Public Law 480 due to widespread hunger. The Green Revolution, focused on wheat farming in Punjab, transformed a previously desolate region.
Japan’s experience demonstrates how an agricultural revolution can foster rapid growth. After World War II, General Douglas MacArthur, the Supreme Commander for the Allied Powers, implemented revolutionary land reform in Japan. Feudal Japanese landowners had influenced the government to engage in foreign conflicts, financing war resources through loans from the UK. The Americans recognised that this feudal land ownership system fuelled Japan’s militarism. Following their victory, the Americans pressured Japan to enact radical land reform. Later, in 1950, the Korean War resulted in the division of the Korean peninsula. To bolster South Korea, similar land reform and infrastructure investment strategies were implemented. The same approach was taken in Taiwan by Chiang Kai-shek after his defeat by the Chinese Communist Party in the Chinese Civil War in 1949.
Land reforms and the Green Revolution increased agricultural productivity. This surplus production facilitated the growth of food processing industries. As agriculture became mechanised, labour force participation in the sector decreased. Simultaneously, women’s participation in agro-processing and manufacturing significantly increased, with labour released from agriculture transitioning to manufacturing jobs. Japan, South Korea and Taiwan gradually transformed their economies through the development of sophisticated technologies.
Before transitioning to service-sector-driven economies, these nations established a strong foundation in agriculture and manufacturing.
Against this backdrop, we must understand the structural evolution of the Nepali economy while considering its structural reform. Nepal has yet to experience a full agricultural transformation; the subsistence level of agriculture, with high labour participation, hinders progress. Our manufacturing sector’s contribution to GDP, once at 10-11%, has declined to a mere 5%. Nepal transitioned to a service-based economy without a strong foundation in agriculture and manufacturing.
In economics, we distinguish between tradable and non-tradable goods. Fast-moving consumer goods (FMCG), automobiles and home appliances are tradable goods, while services like those provided by doctors, accountants, engineers, accounting firms, airlines, hospitality and beauty parlours are non-tradable. The real exchange rates of service-driven economies have appreciated. Nepal’s shift to the service sector coincided with labour law reforms that facilitated Nepali emigration for foreign employment. Consequently, Nepal began receiving substantial remittances (foreign exchange). The Nepali currency has been pegged to the Indian currency since 1993, with an exchange rate of INR 100 to NPR 160. Over the last three decades, the Indian economy has undergone a massive transformation, becoming the fifth largest in the world. However, the exchange rate with the Indian rupee has remained unchanged.
Based on purchasing power parity (PPP), we can assume the real exchange rate with India. When we consider the real effective exchange rate (REER), the competitiveness of the country’s tradable goods may collapse. The service sector already contributes 63% to Nepal’s GDP, as we are focused on non-tradable sectors such as finance, hospitality, airlines and media, among others. While income has increased over time, production has not kept pace, reducing our competitiveness.
After the formation of the UPA government in India, the budget’s focus shifted to rural infrastructure and agriculture for a decade, starting in 2004. Under Prime Minister Narendra Modi, the emphasis shifted to infrastructure development to enhance competitiveness. During a recent trip from Srinagar to Jammu, I was impressed by the 9-10 km long tunnel road and high-rise bridges. Simultaneously, the Modi government is emphasising agricultural sector development through subsidies for chemical fertilisers, bank loans and separate state-level tariffs for transporting agricultural products. India’s highly competitive agricultural imports have devastated Nepal’s production base, as these imports are far cheaper than our domestic products.
Nepal is not a city-state like Singapore, Monaco or Luxembourg, and therefore cannot solely rely on a service-driven economy. With 4 million hectares of arable land, Nepal’s structural economic transformation must begin with agriculture. Mark Rosenberg and Hans Peter Binswanger have published influential papers explaining why the private sector is reluctant to invest in agriculture, citing primarily the lack of insurance coverage and difficulties in protecting intellectual property rights, among other factors. Therefore, government intervention is essential.
Nepal’s average paddy production yield per hectare is 3 tonnes, while farmers in Bhaktapur previously produced around 6-7 tonnes. This indicates that with fertilisers and timely irrigation, production can double. Disguised unemployment is high in Nepal, meaning marginal productivity is effectively zero. For example, if 10 members of a 15-member family working in agriculture were removed, production would remain the same, demonstrating the lack of marginal benefit from the participation of so many workers.
Nepal introduced a land use policy a few years ago, but full implementation has been lacking. In Malaysia, for example, landowners must declare their land use, and changing crops or farming practices is difficult. Agriculture in Nepal is under-mechanised and not a preferred career path for university graduates. The government initiated the Agriculture Perspective Plan (APP) in 1995, which aimed to incentivise agricultural activities suited to specific areas. Farmers were ineligible for incentives if their activities did not align with the identified potential, though they were free to pursue them. The Nepali Congress government began developing the APP, which was later endorsed by the Man Mohan Adhikari-led government. Subsequent governments failed to implement the plan. Without a strong foundation in agriculture, no development initiative will be sustainable.
The government cannot halt the growth of the service sector, but it can prioritise real sector development. Former Finance Minister Surendra Pandey attempted to orient the economy toward the real sector, prioritising hydropower and cement manufacturing. The government announced plans to provide access roads and electricity to cement mines and plants. The subsequent export of hydropower and cement to India and the regional market is encouraging.
Analysing the share of intermediate consumption in gross value added reveals high intermediate consumption in manufacturing, tourism and agriculture compared to the trading sector. Wholesale and retail trade has the lowest share of intermediate consumption, indicating higher profitability. Consequently, trade is less risky and highly profitable. Given the longer gestation period of manufacturing compared to trade, entrepreneurs are reluctant to invest in the real sector.
The manufacturing sector is hampered by administrative and procedural complexities and the high cost of land acquisition for establishing industries. The government must address the issues hindering the development of the agriculture and manufacturing sectors.
Furthermore, policies on paper alone are insufficient. While the government announces procurement prices for paddy/rice, sugarcane and other agricultural commodities, and allocates a budget to the Food Management Company, the company’s untimely purchases force producers to sell their products at lower prices. A decade ago, while serving as an advisor to the Ministry of Finance, I helped formulate the Public Godown Law, which included infrastructure for a commodity market exchange. Providing warehouse receipts to farmers, which could then be used as collateral for short-term bridging loans, would allow them to sell their products when market rates are favourable.
A Nepali commodity market capable of facilitating trade in locally produced commodities has yet to develop. If the government fails to intervene with a series of reforms, youth outmigration will remain a necessity. Inconsistent government policies, misuse of subsidies and incentives, and lack of market access for producers are negatively impacting agricultural sector growth. The government should focus on creating a synergistic impact by utilising scarce resources to enhance the economy’s productive capacity.
