Nepal’s growth model is broken by design

Three decades of 4-5% GDP growth should signal success for a country. Yet in Nepal the numbers scream stagnation. The country is not progressing. It is simply digging, building, consuming and rebuilding, fueled by remittances and disaster relief—rather than real productivity or innovation.

The Solow-Swan model, analysed by the World Bank, exposes how deep the malaise is. Since 1996, 70% of Nepal’s economic growth has come from capital accumulation—more infrastructural concrete, more low-wage labor, more dependence on foreign paychecks. Meanwhile total factor productivity (TFP)—the principal source of long-term prosperity—has crawled at a miserable 0.25% a year. Compare that to Bangladesh and Vietnam, where TFP leapt at 1-2%, propelling them into manufacturing and tech. 

For a fleeting moment after the Maoist insurgency, the country seemed on the verge of a turnaround. Between 2007 and 2014, relative political stability and half-hearted reforms delivered a 1.3% TFP growth. But the progress proved short-lived. A cascade of shocks—devastating earthquakes, an Indian blockade, chronic power cuts and the COVID-19 pandemic—sent productivity spiraling into negative territory. 

The reasons for that collapse read like a development-textbook case of economic malpractice. The country spends a paltry 0.3% of GDP on research and development—just one-third of Bangladesh's already meager investment. Industries endure daily power outages, forcing them to rely on expensive diesel generators that erase profit margins. Bureaucratic red tape and endemic corruption strangles innovation. Vocational training reaches fewer than 5% of workers, churning out a generation of youth with skills as useful as a typewriter in Silicon Valley.

Meanwhile remittances, equivalent to 23% of GDP, keep families afloat but actively undermine long-term growth. Of these cash inflows—equivalent to 1.5 times the federal budget—a significant chunk vanishes into non-essential or market-driven consumption [mainly imported goods], real-estate speculation and land purchases rather than productive investment, a responsibility that ultimately falls on the state. The resulting inflation then makes Nepali exports uncompetitive, and the wage differential—foreign jobs pay five times local wages—drains the labor pool needed for industrialisation. 

The human-capital disaster unfolds daily as 1,700 Nepalis flee—not just for opportunity but survival. The Gulf and Malaysia get nurses and engineers and IT graduates; whereas Nepal gets low-skilled returnees and aging parents. 80% of workers are trapped in informal drudgery, from subsistence farming to petty trade and day labor, never ascending to factories or tech. In parallel Kathmandu's glittering real-estate boom steals attention from a disturbing rural collapse. 60% of farmland is now fallow as the working-age population head abroad. Yet the country paradoxically imports processed foods like noodles and biscuits, commodities that could easily be produced domestically.

Manufacturing's share of GDP has halved since 2000. Energy shortages force factories to operate at 30-40% capacity. Unlike Bangladesh's garment sector or Vietnam's electronics boom, the country lacks any coherent industrial strategy, and its tariffs penalise local producers by making imported raw materials more expensive than finished goods. 

Even much of its IT exports—touted as the economy’s great hope—consist of low-value gig work (for example: basic web design, data entry) on platforms like Upwork and Fiverr, where Nepali workers compete in a race to the bottom among global-wage scales. The sector employs a dismal 0.5% of the workforce, attracts under $10 million in annual investment and has few, if any, scalable firms. True, computer-services exports cross $500 million* a year (official figures; actual estimates range from $300–400 million), but the country lacks the ecosystem to grow from freelancing to product creation.

The dammed potential

What is more, the country has 45,000 MW of hydropower potential—enough to light up South Asia. Yet it still imports electricity from India. Whereas Norway built an aluminium empire on cheap hydropower, Nepal’s surplus energy vanishes into thin air because no energy-intensive industries exist to consume it. The Upper Tamakoshi project, a symbol of dysfunction, took 15 years to complete, longer than it took China to build the Three Gorges Dam. Political meddling, bureaucratic sloth and a total lack of vision have turned what should be the country’s biggest edge into a losing opportunity. 

It does not have to be this way. Remittances will not save the country. But they could fund its salvation. Rather than blowing this cash on electric SUVs and land speculation, the nation could issue diaspora bonds to funnel billions into industrial parks and export zones. It also makes sense to slash taxes for garment factories, agro-processors and IT firms that actually earn foreign exchange—to rejuvenate sagging productivity. Most important, reform the labor market, for example, by emulating Germany’s vocational model. Train workers for real jobs not theoretical ones. Formalise the informal economy, half of which operates in the shadows. Enforce labor laws and make it easier to register a business. On energy, the country should fast-track hydropower projects, provide guaranteed returns to private investors. It could subsidise strategic exports, too. If Bangladesh can conquer global garment markets, why not us? Agriculture meanwhile needs a reset: end the farce of land fragmentation, consolidate farms and mechanise. Last, build processing hubs that turn tea, coffee and herbs into branded exports not raw commodities sold for pennies. 

Absent a change in its growth model, Nepal would join the ranks of countries that grew—but never got rich.

*Freelance platforms (70% of exports); outsourcing firms (25%); product companies (5%)