The Slow Death of Agriculture’s Share: Structural Transformation in Nepal’s GDP, 1975–2023

Abstract

This paper explores the long-term trend of agriculture's share in gross domestic product (GDP) in Nepal from 1975 to 2023 and queries the factors behind the structural shift of the economy. The analysis is performed embedded in a multivariate vector error correction model together with real GDP per capita, urbanization rate, remittance inflows, trade openness, and the agriculture share. The Johansen procedure found one cointegrating vector, as all five series are integrated to the order one level. The estimated long-run equation indicates that the agriculture share is decreasing at the rate of 0.34 per cent with respect to real income, 0.41 per cent with respect to urbanization, and 0.17 per cent with respect to remittances. The impact of trade openness is small and negative. In the case of the agriculture share, it is found that Granger causality runs from income, urbanization, and remittances to the agriculture share, but not the other way around. The error correction term in the agriculture share equation is negative and significant, with some two-tenths of any deviation from long-run equilibrium corrected roughly one-fifth of a year later. The results suggest a statistical and ‘actual’ structural change in Nepal, which is driven more by labour-market and demand-side factors and less by productivity improvements within agriculture. Policy implications are linked to agricultural productivity, non-farm economy labour demand, and managing structural change due to remittances.