Trends in policy development

Nepal's economic development depends critically on natural resources that are fragile and being rapidly degraded. In Nepal, the links between poverty, economic incentives, institutional weaknesses in government, and the destruction of land, water resources, and forests are more starkly visible than in countries where environmental damage is not, or not yet, so severe. A new OED study analyzes the projects, policies, and institutional reforms that have affected the management of Nepal's natural resources over 25 years (1966-89). The study finds that despite $4.5 billion of aid for projects affecting natural resources, Nepal still has worsening environmental problems and no effective strategy to address them. The Bank's own assistance has done little to promote better natural resource management except within the sphere of the individual projects it has financed. Yet, as resource degradation continues, the country's scope for improving living standards diminishes. Because better resource management will require not only financial investments but changes in policy, institutions, and individual behavior, environmental concerns urgently need to be incorporated into decision making at all levels. Development, environment Ninety percent of Nepal's GDP and employment comes from agriculture, yet soils are very poor. The topography hampers the development of transport, communications, and a monetized economy. Population growth is 2.7 percent a year. Problems such as persistent soil erosion, high rates of sedimentation, increased flooding, and decline in water quality continue to intensify. Pressures of population and livestock on land, migration to fragile areas, and the extent of poverty are all implicated (see box). But so too are development policies and projects. Six forms of capital participate in the development process-- human, natural, institutional, cultural, physical, and financial. Sustainable development comes from attaining a balance across the various forms of capital over space and time. In Nepal, the accumulation of physical and financial capital has been sought more aggressively than the acquisition of human and institutional capital or the conservation of natural capital. But as natural capital continues to deteriorate, the possibilities for sustainable development diminish. Studies assessing natural resource degradation in Nepal appeared as early as 1959, but offered few suggestions for managing natural resources better. Bilateral donors were the first to develop programs in soil conservation, land management, afforestation, and livestock rationalization. Most of these programs were quite narrowly conceived and not pursued in the context of an overall understanding of causes and effects or of a broad donor/government development strategy. Nepal's early National Development Plans gave little attention to the environment and natural resources; most public investments were for roads and telecommunications. The Bank began to address environmental problems much later than Nepal's other donors and, even then, without an explicit statement of the problems. The literature over two decades has severely criticized the way decisions were made and government policies formulated in Nepal, and how little international aid has done to bring about change. Between 1966 and 1989, donors committed more than $4.5 billion (1988 dollars) in grants and loans to Nepal for about 800 projects affecting the use of renewable resources. But much of this aid supported uncoordinated projects that duplicated or cancelled out each other's efforts. Proliferating projects and conflicting advice drained the government's managerial, technical, and financial resources. Donors noted Nepal's limited absorptive capacity but went on providing aid. The Bank's role 1965-75: Early Bank lending financed mainly capital-intensive infrastructure projects, on the basic assumption that physical and financial capital were the factors limiting development, and that other forms of capital would naturally adjust. Agricultural operations tended to concentrate on maximizing land productivity through the provision of physical inputs such as fertilizer. The first of the Bank's reports to address issues such as soil erosion and land degradation were produced in the course of agricultural sector work, mainly out of concern for agricultural productivity; some of the findings were incorporated into rural development and forestry projects. Lending on a limited scale, the Bank could not press for the improvements in resource management it had begun advocating in sector work. Nor was it Bank policy at the time to emphasize the policy context or the environmental implications of the projects undertaken. 1976-85: The Bank emerged as a major donor with a diverse portfolio that made it well placed to pursue a policy dialogue on broad resource management issues. During this decade, the Bank's own policies increasingly laid stress on the policy context for lending, on poverty, and on safeguarding the environment. Yet the design of its operations does not suggest much broadening of concern beyond the individual project level. Nor does the record suggest that the Bank forcibly argued for the changes being recommended in ESW. 1985-89: Several projects mark a significant move toward addressing resource management on a broader front: strengthening the National Planning Commission (1988), community forestry (1989), integrated watershed management planning associated with the Arun III hydroelectric dam, proposed changes in the structure of irrigation lending, and renewed emphasis on education. The Bank's 1989 agricultural sector report made clear that fundamental problems of fragility, soil quality, and climate could no longer be ignored, and that the emphasis of Bank operations must shift away from providing physical inputs and toward education, development of institutional capital, and conservation of natural capital. This outlook, now pervasive in the Bank's ESW on Nepal, is not yet fully reflected in the Bank's lending. The policy dialogue between the Bank and Nepal has improved as a result of the Bank's support for structural adjustment. In the course of SAL I (1986) the Bank obtained significant agreement among major donors on the priorities and conditions for institutional change. It also successfully pressed for policy changes in the budget, industry, trade, agriculture, and forestry, all of them with critical implications for resource management over the medium and long term. But much more needs to be done, as concerns the design of adjustment programs, public investment and expenditure reviews, and national environmental action plans, to incorporate natural resource management issues into plans for policy and institutional change.