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Nepal's economic development depends critically on natural resources that are fr agile 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 e nvironmental 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 str ategy to address them. The Bank's own assistance has done little to promote bett er natural resource management except within the sphere of the individual projec ts 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 behavi or, 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 a re very poor. The topography hampers the development of transport, communication s, and a monetized economy. Population growth is 2.7 percent a year. Problems su ch 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, in stitutional, cultural, physical, and financial. Sustainable development comes fr om 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 mor e aggressively than the acquisition of human and institutional capital or the co nservation 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 195 9, 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 o f 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 m ade and government policies formulated in Nepal, and how little international ai d has done to bring about change. Between 1966 and 1989, donors committed more t han $4.5 billion (1988 dollars) in grants and loans to Nepal for about 800 proje cts affecting the use of renewable resources. But much of this aid supported unc oordinated projects that duplicated or cancelled out each other's efforts. Proli ferating projects and conflicting advice drained the government's managerial, te

chnical, and financial resources. Donors noted Nepal's limited absorptive capaci ty but went on providing aid. The Bank's role 1965-75: Early Bank lending financed mainly capital-intensive infrastructure pro jects, on the basic assumption that physical and financial capital were the fact ors 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 B ank could not press for the improvements in resource management it had begun adv ocating in sector work. Nor was it Bank policy at the time to emphasize the poli cy 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. Du ring 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 d esign of its operations does not suggest much broadening of concern beyond the i ndividual project level. Nor does the record suggest that the Bank forcibly argu ed for the changes being recommended in ESW. 1985-89: Several projects mark a significant move toward addressing resource man agement on a broader front: strengthening the National Planning Commission (1988 ), community forestry (1989), integrated watershed management planning associate d with the Arun III hydroelectric dam, proposed changes in the structure of irri gation 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 natu ral 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 B ank's support for structural adjustment. In the course of SAL I (1986) the Bank obtained significant agreement among major donors on the priorities and conditio ns for institutional change. It also successfully pressed for policy changes in the budget, industry, trade, agriculture, and forestry, all of them with critica l implications for resource management over the medium and long term. But much m ore needs to be done, as concerns the design of adjustment programs, public inve stment and expenditure reviews, and national environmental action plans, to inco rporate natural resource management issues into plans for policy and institution al change. Project difficulties. A high proportion of projects suffered from time and cost overruns. Almost always in these projects, the institutional apparatus has been weak and government commitment at the policy and implementation level has been i nadequate. With hindsight, the Bank underinvested in education and institutional developmen t in Nepal. The infrastructure projects that dominated its early lending were re latively simple to implement. But even many of these began to fail for lack of i nstitutional and human capital to manage and maintain them. Technical assistance

has been used to help Nepal strengthen its development institutions and add to its human resources, but many of the TA initiatives have not been very successfu l either. Bank-financed operations have been less than successful in dealing with the huma n and natural environment. For example, the Bank considered development in the T erai a key to Nepal's growth, but the attempt to establish settlement projects t here failed, in the face of a host of problems related to environmental degradat ion and lack of government commitment, very high overhead costs, and unhelpful c hanges in the policy environment. In preparing many of its projects the Bank tended to gloss over the difficulties in improving resource management in Nepal. Little is known about the behavior o f natural and institutional systems and how they interact. Farming and forestry have minimal potential for growth. Possibilities for creating jobs outside these sectors are very limited. Bank President's reports on many of the projects revi ewed imply that all uncertainties have been carefully weighed and can be managed by contingencies built into project design. But the outcomes of these projects show that more candid assessment of the obstacles, recognizing the history of co nstraints already encountered by the Bank and other donors, was needed. Lack of strategic thinking. The Bank's country economic work gave little promine nce to natural resource problems until quite recently. The policy dialogue with Nepal at the national and sector levels rarely addressed natural resource manage ment issues comprehensively. Until quite recently, the choice of projects (among and within sectors) and the subjects of loan conditionality and policy dialogue show little concern with the recommendations for strategic thinking about resou rce management that were emerging from economic and sector work. In Nepal, more than in many larger and more advanced borrowing countries, the Ba nk was a major source of ideas on resource development and management. But by no t having a strategy of its own, it missed an important opportunity to create a c onsensus on policies or actions needed. Its reports were an important part of th e development literature and were widely quoted. But those used in the policy di alogue with the government minimized the discussion of contentious issues on nat ural resource management. They also took little account of the findings of other donors, even though these were thoroughly documented in the Bank's country prog ram papers. Government agencies may not have been receptive to discussing resource managemen t beyond the confines of projects in agriculture, forestry, hydroelectricity, wa ter supply, and highways. For the Bank, indeed, an approach focusing on long-ter m goals would have called for more staff time for preparation and supervision, m onitoring and evaluation, and economic and sector work, than compatible with nor mal coefficients for a lending program of Nepal's size ($35 million a year in th e late 1970s). Had the Bank's policy analysis and dialogue fully reflected the debates on resou rce degradation, resource management, institutions, and aid in Nepal, research a nd data collection would have focused more on the key gaps in information about the economic, social, and institutional factors affecting the environment. The v ital importance of links between poverty and resource degradation would have bee n recognized earlier, and a larger part of the lending program would probably ha ve been in primary and secondary education, health, and population. More sustain able use might have been made of both financial and technical assistance. Looking ahead Nepal's decisions on development policy and economic management at all levels ur gently need to take more systematic account of environmental concerns. Tradition

al economic assumptions about the sources of growth or comparative advantage, wh ich often shape donors' perceptions of the most critical needs and the most suit able instruments for addressing them, need to be modified to incorporate more re alistic notions of opportunity cost and economic prices. Calculations of economi c prices must take account of the external effects of the proposed interventions over space and time--over and above the traditional method of calculating margi nal costs. Resource degradation problems should be a central concern in the desi gn of both macroeconomic and sectoral policies. Here the Bank could make a major contribution. For the Bank, financing projects without regard to an overall strategy is not an effective way to press for the changes in government policy, institutions, and individual behavior that are required for better resource management in Nepal. P rogram lending has a potentially bigger impact on the way sectors are managed an d on policies and regulations that affect economic incentives. The expectation o f an extended structural adjustment period (10-20 years) provides a context for the Bank and other donors to work with the government to produce a national stra tegy for resource management in which project lending and policy change can rein force one another. To this end the Bank should: - Help the Government prepare a Consultative Group Meeting for the agricultural/ rural sector to seek a consensus among government agencies, donors, and concerne d NGOs, on what can be done, who will do it, and how. - Require more careful analysis of the effects of macroeconomic instruments, inc luding those being supported by structural adjustment lending, on natural resour ce use. - Encourage the modification of Nepal's national accounting system to reflect ch anges in natural resource allocation and use. At present, it does not and thus g ives a false sense of progress for the economy. - Assess proposed public investments and expenditure allocations not only on the ir own merits but also from the broader perspective of the whole portfolio, trac ing how its components affect one another. Also assess these proposals from the point of view of their contribution to the sustainability of Nepal's development . - Consolidate efforts already underway to formulate macroeconomic and sectoral a djustment policies that are mutually consistent. At present, macroeconomic polic ies (concerned mainly with growth) and sector policies (focusing more on sustain able development) are often conceived separately, increasing the risk that they will contradict each other. - Consider new lending instruments to accommodate a resource management program that yields its main results only over a long period. Without a significant chan ge in this regard, the tendency will remain to allocate scarce resources to amel iorate short-term problems--as a result, attempts to bring about sustainable dev elopment will fail. Box 1: Factors in resource degradation Many aspects of Nepal's resource use and institutional structure took a long tim e to be documented and thus to be featured in discussions of possible policies a nd programs. Opinions still differ about the main causes of environmental degrad ation, with some observers claiming that at least 70 percent of the erosion in t he hill country each year is inevitable and due to natural geological factors. M any analysts stress the role of population pressure, land use legislation, and a weak public administration.

Population pressure: Aided by improved health care and malaria control, annual p opulation growth increased from 1.4 percent in the 1950s to 2.6 percent now. Rap id population growth increased demands for fuelwood, timber, fodder, and land fo r grazing and food production. Forest reserves were reportedly halved between 19 50 and 1980, and risk being completely exhausted by year 2000. As soil erosion a ccelerated, soil fertility declined, village water supplies were disrupted, and agricultural production decreased, reservoirs were silted up by the sediment bro ught down by rivers, water courses became unstable, and the increased run-off du ring the monsoon season caused catastrophic flooding in the plains. Noting the pressure of population, commentators in the 1970s warned of an impend ing food crisis, and aid donors responded by emphasizing agricultural modernizat ion. But although farm inputs rose as a result, yields improved little because e xtension services, along with the distribution of seeds and fertilizer, were ina dequate. And although double cropping was extended to 80 percent of the cultivat ed land, livestock numbers were not commensurately reduced, and grazing pressure s on forest fringes increased. By the 1980s, 40 percent of the labor that could have been used for farming was used for fuelwood collection; as a result, produc tivity had declined, real incomes from farming had fallen, and child nutrition h ad worsened. Land use legislation: When it emerged from isolation Nepal had one of the most i nequitable land tenure systems in Asia, and one that seriously hindered agricult ural efficiency. Legislation to reduce the size of large farms, control rents, a nd improve security of tenure is said to have been ineffectual. Many tenants bec ame landless laborers, not landowners. As to public land, the Private Forest Nationalization Act of 1957 is blamed for much of Nepal's deforestation and the cycle of resource destruction that followe d. Intended to ensure proper management and conservation of forests, it could no t be enforced, and in practice replaced traditional systems of managing common l ands with free access to them. Villagers had no incentives to protect forests. F orest legislation of the 1970s and 1980s recognized that sound forest management would have to rely on community involvement, but it contained loopholes that al lowed villagers to cut trees, and did not affect the exercise of the traditional view that clearing land for agriculture was a way to obtain title to it. Land-u se data for 1977-84 show a net decline in forest, shrub, and cultivated area and a net expansion of grasslands. Public administration: The Nepalese administration has long been weak in develop ment planning and implementation. Problems in the period reviewed included rapid turnover of senior decision makers, low staff morale, limited career prospects for mid-level staff, and uncertain job security. Decision making was over-centra lized and coordination weak. Many senior officials reputedly knew little about r ural Nepal. An attempt during the 1970s to strengthen decentralization through t he panchayat system (village level organizations) merely reinforced the power of local elites. To promote efficient equitable growth through sustainable use of natural resources will require institutional reform at the national level.