Empirical analysis of the impacts of economic liberalization in nepal

The main objective of this move was to attain sustainable economic growth which was an indispensable venture by the major policy makers. This study supplements the data available about Nepal by assessing the effects of financial and commercial liberalization on overall economic growth. For successful evaluation, this research involved the use of error correction model where autoregressive distributed lag approach was determined with the help of JJ co-integration and fully modified OLS method. The result shows two intriguing outcomes – firstly, whereas economic liberalization changes could have direct positive impacts on the general economy of Nepal in the short-term, trade liberalization, however, affects economic growth negatively after some time. Besides, the calculated coefficients indicate how economic liberalization strikes unstable outcome on the country’s GDP especially between 1975 and 2015.

Comparatively, the outstanding debt capacity had equally shot from 22% of the GDP in 1985 to 53% of the country’s GDP by 1990. In addition, even as the agricultural sector had thrived relatively well as a result of favorable climatic conditions, Nepal’s annual growth rate was still below standard, standing at 4%. Due to these negative outcomes, the poverty level had risen to 71% from 42. 55% between 1985 and 1990. As a result of this trend, both the workers and the general population were disadvantaged by the high cost of living that had descended the Asian country. In the process of this fiasco, individual capitalists also acquired public enterprises even though most of these institutions still operated on profit terms. Interestingly, the government provided full these privatized organization full power to monopolize the market; a move that inadvertently led to excess increase in prices and the ultimate overburdening of the Nepalese citizens.

As consumers continued feeling the economic pressure on them, the authority failed to reconsider their wages and salary to streamline it with the increasing cost of life. The attempt to raise the productivity and efficiency of workers, the policy makers introduced retrenchment programs leading to massive ousting of local employees. Consequently, the country experienced the worst increase in product prices. As such several nations adopted the policies that fostered economic liberalization with the intent to empower and grow their economic status. Indeed most nations adopted the approach at a specific time of their history as documented by Gulaliyev, Ok, Musayeva, Efendiyev, Musayeva, and Agayeva (2016). However, the economists differ on the actual outcome of the approach in varying nations. According to Hye, Lau, and Tourres, nations depict positive outcome from the approach on the short term but experience serious drawbacks on longterm applications (2014).

Gulaliyev, Ok, Musayeva, Efendiyev, Musayeva, and Agayeva, suggest that the approach yields negative outcomes for developing nations (2016). Third, the article discusses at large the state of the economy as either leftist or right which play a vital role in the determination of the outcome. These inclinations influence prime economic decision and reforms and thus directly affect the outcome (Gulaliyev, Ok, Musayeva, Efendiyev, Musayeva, & Agayeva, 2016). The literature provides measures of consideration within the two countries that may feature with Nepal. However, unlike the two countries, Nepal experience a number of positive factors that favor liberalization as discussed by Bista (2017). According to Bista, Nepal portrays a number of positive factors that could positively encourage economic liberalization (2017). Unfortunately, majority companies invest in market and profit based industries as opposed to potential untapped areas.

According to Bista, foreign investors in Nepal focus more on manufacturing and tourism as opposed to water resources, which constitute perhaps the largest potential (2017). This lowers the country's production and tapping of potential growth areas and thus lower the output. Besides, the article relates economic liberalization to dependence when another country invests hugely and thus have significant control of the country’s GDP. China, for instance, commands over 34% of Nepal's foreign industries (Bista, 2017). Consequently, the same depends and equally contributes to economic liberalization. In Nepal, since the enactment of policies supporting liberalization, the demand for financial dependence has steadily risen as detailed by Bhetuwal (2007). On the other hand, the growth in the financial section avail more funds for economic growth. Economic and financial liberalization remain tangled, interrelated, and interdependent as discussed by Bhetuwal (2007).

The findings of the article differ with the prior suggestions by discussed articles in a number of ways. Kharel detail that industrial and trade measures constitute core elements of macroeconomic development (2014). The investigation found out that trade liberalization promotes importation, exportation, foreign exchange, increased sources of commodities, and competition (Bezuneh & Yiheyis, 2014). These factors enhance the availability of commodities and neutralize deficiencies. As a result, the article document that trade liberalization impacts positively on food security and by extension economic growth (Bezuneh & Yiheyis, 2014). The findings relate to prior outcomes documented by Kharel who found a positive relationship between trade and liberalization (2014). However, the nation experienced a decline in industrial growth for the period 1992 and 2010 despite economic openness (Kharel, 2014). As a result, the article suggests that short-term openness positively influence industrial growth.

Consequently, the article found a positive average impact of liberalization for the period between 1975 and 2010 (Kharel, 2014). This introduces an essential division of pre and post liberalization that probably explains some of the differences highlighted. These periods depict different outcomes that influence the overall performance. On the other hand, others suggest that economic liberalization results in a positive outcome for a short time but negative consequences in the long run. Other studies found out that the measures of liberalization have an overall positive impact over the long term despite negative outcomes in the post-liberalization. Whereas some findings show an outright positive outcome, some depict either negative or stagnant economic development over the same period. Precisely, the researchers and findings do not agree on the actual outcomes of economic liberalization in Nepal.

There is therefore sufficient need to undertake research that will contribute towards the available literature. Consequently, average results for various nations differ from that of individual countries. Azerbaijan, Nepal, and Turkey constitute some of the detailed examples. It's therefore important to analyze the impact of economic liberalization in comparison to these countries. Equally some of the investigations on the area were conducted long time and lack updated information. The study provides up to date data for the same. For the study at hand, we used fully modified OLS alongside JJ cointegration. The model according to Hong and Wagner (2011) estimates is given by Labor force Job productivity and employment as related to available opportunities for employment measure economic growth. Typically, economic growth should relate to employment opportunities available.

A growing economy creates opportunities hence a rise in employment rate as compared to reducing employment rates. Labor force therefore strongly related to economic growth. Despite the decrease in the previous period, it’s clear that generally, the country experienced an increase in the labor force for the discussed timeline. Income Income directly influence the living standards and thus purchase power, market power, and individual growth (Shrestha, 2017). It influences investors' profit and by extension government revenue and thus constitutes an important indicator of economic growth. Generally, higher income influence national domestic product. Indeed, Muhammad, Hye, and Lau (2017) demonstrate the influence of increased average income to economic growth. Shrestha document exports and import rate as the prime indicator of trade. The equation below present the relationship with the assumption that commodities were either imported or exported but not both.

T=absolute summation of (Exports-Imports) as a percentage of the GDP Figure three depict Nepal’s import and export levels for the period. The exports rose gradually during the pre-liberalization period and then dropped drastically after the liberalization. The actual current export value compares to the equivalent in the 1980s. Available data suggest a sharp fluctuation of industrialization in Nepal. Immediately after the adoption of policies favoring liberalization, industries sprung and aided in the industrial growth as shown in figure four. However, post-liberalization witnessed a gradual drop in the industrial sector. Despite the drop, the actual current values remain higher than the initial figure before liberalization. Figure 4: percentage industrial growth of Nepal courtesy of World Bank Financial Liberalization According to Bekaert and Harvey, openness increases foreign investment which in turn drive high local equity (2001).

Consequently, figure six depict a rise during post-liberalization. The country exhibit higher values during the post-liberalization period for both inflow and outflow FDI measures. Figure 5: FDI inflow as a percentage of GDP Figure 6: FDI outflow as a percentage of GDP OLS results Figure7: OLS model summary Figure 8: OLS variable results Figure 9: Results of correlation analysis The OLS model yielded p=0. 05 hence the null hypothesis of no effect was rejected. This shows that trade, financial liberalization, labour force and FDI Inflow have a significant effect in income. Their variation either aid in the rise or drop of the economic state. The governments, therefore, strive to influence these factors with the intent to boost the economic status. Nepal embraced liberalization as an approach to enhance these indicators through increased industrialization, finance, employment, and trade.

However, the findings suggest mixed reactions of the outcome as compared to the perceived expected results. Whereas income increased steadily over time, labor force remains almost the same value with little fluctuation. E=kL+kI+kF+kT The findings suggest that during the pre-liberalization period, all the variables experienced a drastic rise. These findings concur with previous investigations by Bista that immediate economic liberalization results in immediate economic growth (2017). It also relates to other studies by Muhammad, Hye, and Lau (2017), Gulaliyev, Ok, Musayeva, Efendiyev, Musayeva, and Agayeva (2016), and Kharel (2014). It was clear that all indicators support immediate increment when subjected to openness. The actual performance rises gradually influencing economic growth positively. The study analyzed the impact of the same as related to economic growth in Nepal using annual data from 1975 to 2015.

The results indicate that Nepal’s economy grew drastically immediately after the adoption of liberalization. Trade, employment rate, industrialization, and financial liberty grew positively during the pre-liberalization period. However, financial liberty, employment, and industrial depreciated during the post-openness period. Indeed, the labor force ratio to the population remains almost the same in 1975 and 2015. These indices constitute important elements of growth. As such, policies ought to propel their rejuvenation and growth. Several potential areas of development such as water harnessing remain untapped and highly underdeveloped. As a result, the government ought to develop more policies to encourage investors into these areas. • The government of Nepal also needs to consider policies to propel employment of the citizens to increase both average income and labor force.

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