The newly elected team at the municipalities of Nepal have two main tasks – provide effective public services to the people they serve and create jobs so that the young population stay back to drive the economy. Generating jobs at the local level requires the local governments to prepare a well-thought-out plan reflecting the vision of the new, young, and aspiring leaders.
After restructuring to federal governance structures, Nepal’s 753 local governments (293 urban and 460 rural municipalities) are not only powerful governance units but also resourceful. These bodies have substantial resources with reasonable fiscal transfers from the federal government and the constitutional rights to collect revenue in certain areas. However, the power and the resources are not used optimally.
Nepal’s economy is largely dependent on agriculture and remittances. Underutilized natural resources and high trade deficit is typical characteristics of the Nepali economy now. We are aiming to graduate from the LDC status by 2026, which means that there won’t be preferential treatment of our export products in the western markets. Therefore, improving productivity of the sectors that form the basis of our economy – agriculture, tourism, service industry, manufacturing, through policies and programs of all three tiers of government is what we need desperately.
The productivity of economic activities lies on how effectively the factors of production (land, labor, and capital) are used. Productivity is a function determined by technical efficiency of the system and processes to convert inputs to output. A vast amount of research show that increased productivity leads to economic growth through business environment reform and value chain or market systems interventions. It helps in increasing labor productivity within economic sectors which is the main driver of economic growth. In our context, the business environment is unstable and risky, and there are a lot of gaps in the value chains of the sectors mentioned above – from local level production to selling it in local, national, and global markets. Therefore, to improve productivity, we need to make conducive policies and plans to nurture businesses by identifying gaps in the value chains and provide support to fill those. It is only through these interventions that the country will be able to create a business environment that helps develop entrepreneurs and profitable businesses. The municipalities should prepare their local economic development (LED) plan, which is to build the economic capacity of their area to improve their economic future and quality of life.
What Municipalities can do to Improve Productivity
The municipalities, with the power and resources they have can actively work towards creating a business environment through supporting the value chains locally. They can form a large foundation of economic actors or establishments that can have a huge nation-wide impact, contributing to overall economic growth. This would require reorienting their focus towards local economic development (LED) by offering opportunities to gain efficiency in the system and process of the economic activities within their boundary. It can be done broadly through three ways:
Creating Infrastructure that Promote Value Chains and Enterprises
In the past five years, the municipalities have spent most of their development budget on infrastructure, which includes necessary roads as well as unnecessary view towers. There are only few examples of municipalities investing in warehouse or local irrigation schemes or marketplaces for agri-commodities. Though local planning process is need-based, or demand driven, the articulation of demand is lacking or the intelligence to realize vision for development is not sufficient. Therefore, we are left with such infrastructures that do not contribute to improving productivity of economic sectors. A thorough analysis of potential economic activities as part of LED planning process can point out necessary infrastructure, both public and private. The municipalities can have financing plan which can be PPPs or blended finance approach based on the nature of the infrastructure.
Providing Business Support Services
In the past, very few municipalities had programs to facilitate in providing business support services such as market information, value chain analysis, business plan development, incubation to start ups etc. None had thought of technology transfer or aggregating similar enterprises to create economies of scale within their area or organizing trainings and information exchange events. Municipalities do not have full information of the economic establishments in their area, since from nearly a million economic establishments in the country, almost 50% are not registered anywhere. These large numbers of unregistered and informal enterprises face numerous problems including support services for business growth. The business registration modalities can be strengthened by involving municipalities and making it digitally enabled so that it can be linked with other support services.
De-risking Private Investments and Promoting Access to Finance to Enterprises
The credit infrastructure to support MSME growth, including credit guarantee mechanisms and insurance schemes are not well developed in Nepal. The venture capital financing is insufficient and there are stringent collateral requirements which limits growth of enterprises. The municipalities can help in providing guarantees on MSME loan in partnerships with banks and financial institutions for MSMEs that qualify. Municipalities can also run challenge funds to attract and de-risk private sector investments in certain areas. These will require strong guidelines and bylaws to reduce fiduciary risks.
Improving productivity of private sector enterprises is based on research and development and innovation. It also requires attaining economies of scale and increasing investments in economic sectors. In Nepal’s context, municipalities can play a key role in nurturing businesses locally. However, it will require a paradigm shift in the way urban and rural municipalities’ function and deliver development outcomes locally. Local economic development can be promoted through a tailored approach in each municipality with a strategic plan. The plan should focus on improving productivity which relies on hardware support such as infrastructure, and software support through business support services and capital investments by attracting private sector through incentives.
This article was originally published in the special section of ‘NEFport 49: Local Economic Development Special’ in June 2022.
Saroj is the Country Relationships Manager at UNCDF Nepal, where he has been working since 2017, initially serving as National Programme Coordinator. With over 20 years of experience in Nepal, his expertise spans decentralization, public finance management, financial inclusion, and inclusive economic growth. Before UNCDF, he worked at the Danish Embassy (Danida) for eight years as Senior Program Officer, Chief Political Advisor, and Results Management Coordinator, managing donor-funded programs in governance and agriculture value chains. Saroj holds a master’s in public policy from the National Graduate Institute for Policy Studies, Tokyo, and a master’s in human and Natural Resource Studies from Kathmandu University, Nepal.
