Role of Government in the Economy

Role of Government in the Economy

Government participation (or interference) in the economy was very strong, beginning with the Rana period, which lasted from the mid-nineteenth century until the mid-twentieth century. During Rana rule, there were very few industries other than cottage type, and they were under strict government supervision. After the fall of the Ranas in 1950-51, economic planning as an approach to development was discussed. Finally, in 1956 the First Five-Year Plan (1956-61) was announced.

The Five-Year Plans

Economic plans generally strove to increase output and employment; develop the infrastructure; attain economic stability; promote industry, commerce, and international trade; establish administrative and public service institutions to support economic development; and introduce labor-intensive production techniques to alleviate underemployment. The social goals of the plans were improving health and education as well as encouraging equitable income distribution. Although each plan had different development priorities, the allocation of resources did not always reflect these priorities. The first four plans concentrated on infrastructure--to make it possible to facilitate the movement of goods and services--and to increase the size of the market. Each of the five-year plans depended heavily on foreign assistance in the forms of grants and loans.

The First Five-Year Plan (1956-61) allocated about Rs576 million for development expenditures. Transportation and communications received top priority with over 36 percent of the budget allocations. Agriculture, including village development and irrigation, took second priority with about 20 percent of budget expenditures. The plan, which also focused on collecting statistics, was not well conceived, however, and resulted in actual expenditures of about Rs382.9 million--two-thirds the budgeted amount. In most cases, targets were missed by a wide margin. For example, although approximately 1,450 kilometers of highways were targeted for construction, only about 565 kilometers were built.

After Parliament, which had been established under the 1959 constitution, was suspended in 1960, the Second Plan failed to materialize on schedule. A new plan was not introduced until 1962 and covered only three years, 1962-65. The Second Plan had expenditures of almost Rs615 million. Transportation and communication again received top priority with about 39 percent of budget expenditures. Industry, tourism, and social services were the second priority. Although targets again were missed, there were improvements in industrial production, road construction, telephone installations, irrigation, and education. However, only the organizational improvement area of the target was met.

The first two plans were developed with very little research and a minimal data base. Neither plan was detailed, and both contained only general terms. The administrative machinery with which to execute these plans also was inadequate. The National Planning Commission, which formulated the second plan, noted the difficulty of preparing plans in the absence of statistical data. Further, as was the case with the first plan, the bulk of the development budget depended on foreign aid--mostly in the form of grants. The failure of these plans was indicated by the government's inability to spend the budgeted amounts.

The Third Five-Year Plan (1965-70) increased the involvement of local panchayat. It also focused on transport, communications, and industrial and agricultural development. Total planned expenditures were more than Rs1.6 billion.

The Fourth Five-Year Plan (1970-75) increased proposed expenditures to more than Rs3.3 billion. Transportation and communications again were the top priority, receiving 41.2 percent of expenditures, followed by agriculture, which was allocated 26 percent of the budget. Although the third and fourth plans increased the involvement of the panchayat in the development process, the central government continued to carry most of the responsibilities.

The Fifth Five-Year Plan (1975-80) proposed expenditures of more than Rs8.8 billion. For the first time, the problem of poverty was addressed in a five-year plan, although no specific goals were mentioned. Top priority was given to agricultural development, and emphasis was placed on increasing food production and cash crops such as sugar cane and tobacco. Increased industrial production and social services also were targeted. Controlling population growth was considered a priority.

The Sixth Five-Year Plan (1980-85) proposed an outlay of more than Rs22 billion. Agriculture remained the top priority; increased social services were second. The budget share allocated to transportation and communication was less than that allocated in the previous plan; it was felt that the transportation network had reached a point where it was more beneficial to increase spending on agriculture and industry.

The Seventh Five-Year Plan (1985-90) proposed expenditures of Rs29 billion. It encouraged private sector participation in the economy (less than Rs22 billion) and local government participation (Rs2 billion). The plan targeted increasing productivity of all sectors, expanding opportunity for productive employment, and fulfilling the minimum basic needs of the people. For the first time since the plans were devised, specific goals were set for meeting basic needs. The availability of food, clothing, fuelwood, drinking water, primary health care, sanitation, primary and skillbased education, and minimum rural transport facilities was emphasized.

Because of the political upheavals in mid-1990, the new government postponed formulating the next plan. The July 1990 budget speech of the minister of finance, however, implied that for the interim, the goals of the seventh plan were being followed.

Foreign aid as a percentage of development averaged around 66 percent. The government continually failed to use all committed foreign aid, however, probably as a result of inefficiency. In the Rs26.6 billion budget presented in July 1991, approximately Rs11.8 billion, or 44.4 percent of the budget, was expected to be derived from foreign loans or grants.

Other Development Programs

The government launched the Structural Adjustment Program and the Basic Needs Program in 1985. These programs stressed selfreliance , financial discipline, and austerity as goals through the year 2000. The Structural Adjustment Program sought to confront some of the longer-term constraints to economic growth. Its measures included increasing domestic resource mobilization, reducing the growth of expenditures and domestic bank borrowings, and strengthening the commercial banking and public enterprise sectors.

The Structural Adjustment Program initiative focused on sustainable growth through balance in different sectors of the economy. Rural development in particular was targeted in order to raise the standard of living and increase agricultural production. Funds for education and health services, electricity and power, irrigation, and transportation and communications were provided. Government subsidies were supposed to be removed, new and improved standards of government efficiency were issued, and privatization of government enterprises was increased. Further, domestic resources were more fully used, and domestic bank borrowings and the growth of expenditures were decreased. The initial response to the Structural Adjustment Program was good, as gross domestic product (GDP), exports, and agriculture showed growth.

The objective of the Basic Needs Program was also to improve the standard of living by increasing food production, as well as to provide clothing, health services, and education. Six goals were to be achieved by the year 2000. Daily food consumption was to be raised to 2,250 calories per capita. Each person was to have the equivalent of eleven meters of clothing and a pair of shoes per year. Housing requirements were estimated at thirty square meters per urban household and at forty to sixty square meters per rural household. Essential utilities and sanitation were to be furnished by the government. Universal primary education for all children between five and ten years of age also was to be provided. The government was responsible for supplying teachers, classrooms, and educational materials, although villagers pitched in with labor and supplies to build schoolhouses. The population growth rate was targeted at 1.9 percent by 2000 (down from 2.6 percent in the 1980s), and life expectancy was to increase to 65 years of age by 2000 (up from almost 51 years in the late 1980s). The infant mortality rate was to be reduced to 45 deaths per 1,000 by the year 2000; World Bank figures placed infant mortality at 171 per 1,000 in 1965 and at 126 per 1,000 in 1988. Universal primary health services also were to be ensured, primarily by the government, improved social services provided to handicapped people, law and order maintained, and an environment conducive to development established.

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