Dynamic Computable General Equilibrium Analysis and Econometric Modelling of Growth and Redistribution in Nepal and Neighbouring Emerging Economies
Year: 2025
Type: dissertation
Abstract: This study investigates economic growth and wealth distribution in Nepal through dynamic Computable General Equilibrium (CGE) models and econometric analysis of growth drivers in Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) countries. It forms part of the micro-foundations to macroeconomics in the context of Nepal and other BIMSTEC nations. The study focuses on Nepal’s multi-sector, multi-household framework and examines the impact of taxation on efficiency and welfare, as well as the roles of human capital, governance, and the construction sector in driving economic growth in the region. The concept of balance is central to this investigation, referring to the equilibrium between different policy interventions, such as taxation and government spending, and their effects on economic variables like growth, income distribution, and welfare. Achieving balance in this context means finding policies that foster sustainable growth without exacerbating inequality or destabilizing key economic sectors. This balance is particularly relevant for the research questions as it explores how optimal policy interventions can harmonize economic growth with equity and stability, thus supporting long-term development for all stakeholders in Nepal.The first part of the thesis investigates the impact of tax reform on the Nepalese economy, focusing on the efficiency and redistributive effects for different household groups. The study analyzes which household groups benefit the most from tax reforms amid a changing tax structure, where tax and non-tax revenues, particularly from customs, excise, income tax, and VAT, have seen growth. Using a 17-sector Dynamic Computable General Equilibrium (CGE) model, the chapter simulates tax and trade policy impacts on Nepal’s growth, employment, investment, capital formation, and technological progress over two decades (2020-2040). The model includes representative households, multiple producers, government, and international linkages, which capture the interconnected roles of various economic agents. Results from 11 scenarios show increased economic output, investment, and capital stock, with the zero-tax scenario performing well in all metrics but raising concerns about income inequality and labor market dynamics. While personal consumption and household welfare improve overall, wage stagnation poses challenges for equitable income distribution. This section underscores the need for policy initiatives that balance labor market stability with consumer spending to sustain growth, improve household welfare, and support long-term development for all Nepali citizens.The second part of the thesis explores the role of the construction sector in economic growth, focusing on its contribution to GDP, employment, and infrastructure development. In developing countries like Nepal, the construction sector plays a pivotal role in generating employment and driving both backward and forward linkages across industries. Backward linkages relate to the supply chain for construction materials, while forward linkages pertain to urban development and real estate. Using the same 17-sector Dynamic Computable General Equilibrium (CGE) model, this section examines various investment, tax, and price scenarios. Results suggest that increased investment in the construction sector boosts economic output, capital stock, and household welfare, but wage stagnation raises concerns about inequality. The findings advocate for a balanced policy approach that promotes strategic investment and tax policies to support inclusive growth, address wage dynamics, and ensure broad-based benefits from construction sector growth. Additionally, international cooperation, particularly in energy exports, is highlighted as critical for funding sustainable development in Nepal.Finally, the third part examines the role of institutions and human capital in economic growth in BIMSTEC countries and how these factors are interlinked for sustainable development. Drawing on examples from regional cooperation frameworks such as the EU, ASEAN, and APEC, BIMSTEC offers similar opportunities for economic integration in South Asia, particularly in the absence of Pakistan. With 14 priority areas, including trade, energy, and transportation, BIMSTEC aims to promote regional connectivity, technological collaboration, and economic integration. However, political instability and infrastructure limitations across member countries hinder its effectiveness. This study examines the impact of political stability, regulatory quality, and corruption control on economic growth in BIMSTEC countries using panel data analysis. Data from the World Governance Indicators and World Development Indicators are utilized to assess institutional and human capital factors. The findings show that human capital, investment, and government spending positively impact GDP, with human capital being a key growth driver. However, high consumption shares have a negative impact on growth. The study recommends increasing human capital through education, enhanced infrastructure investment, and promoting exports. Improved data collection and modelling are also crucial to refining future growth estimates and informing policy for sustainable development in the BIMSTEC region.In conclusion, the study suggests balanced policies to promote inclusive growth and long-term stability. In Nepal, tax policies should be aligned to support both consumption and labor stability across various household groups. For the construction sector, policies should promote efficient resource use and equitable labor practices to avoid growth imbalances. Across BIMSTEC, human capital, regulatory quality, and governance should be strengthened. Nepal and other BIMSTEC countries should prioritize regional cooperation, strategic investment, and institutional reforms to foster sustainable and inclusive growth. This emphasis on balance ensures that the economicpolicies implemented are not only effective in promoting growth but also equitable and sustainable in the long run.
Author: Pandit, Binayak
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7046710816
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