Issue 3 | Article 12

ABSTRACT

Due largely to political instability, a challenging business environment, and a geography that was not well suited to economic activity during the farming and industrial eras, Nepal is one of the world’s poorest countries. However, it possesses natural and human resources that are valuable in the current digital, more global era. The author argues that Nepal is well-placed to move into the catchup phase of economic development and become a high-income country during the middle part of the 21st century.

HISTORY

Ancient

Scholars have used legends, documentation, and relics to understand and describe the early history of Nepal. Legends suggest that the valley of Kathmandu was first settled by Dravidians, who arrived from the Indus Valley about 3300 years before the Christian era (BCE) The early rulers of Nepal included the Gopālavaṃśi, or "cowherd dynasty", who were believed to have descended from moon-related deities. The Gopala ruled for about five centuries, before being replaced by the Mahiṣapālavaṃśa or "buffalo-herder dynasty" who in turn were succeeded by the Kirat Dynasty (Shaha, 1992).

The Kirati tribes were the first in Nepal for which documented evidence is available. The Kirati were a Sino-Tibetan ethnic group, whose rule commenced about 1000 BCE. The most famous Kirati, the son of an elected leader of the Shakya clan, was Gautama Buddha (563-483BC), whose teachings became the foundation of Buddhism (Singh, 2008).

In about 400 BCE, the Licchavi clan, from Bihar in India, established their own dynasty in Nepal by seducing the Kirati “with sweet words and defeating them in war.” Their success ushered in what has been described as the “Golden Period of Nepal”, with settlements eventually covering the entire Kathmandu Valley. The Licchavi were ruled by a Maharaja (“great king”), who was supported by a prime minister, other ministers, and nobles. Revenue was raised from land taxes and conscripted labour was used for government projects (Pokhrel, 2017).

In 869 CE, the Licchavi were replaced by the Thakuri, who ruled for about 300 years. Gunakama Deva, who reigned in the latter half of the 10th century, is best remembered for commissioning the construction of a large wooden structure, called Kasthamandapa, that was built from the wood of a single tree. The name of the present capital, Kathmandu, has been attributed to this structure (Wikipedia, 2022).

The Malla dynasty ruled from the 12th to the 18th century. The early Malla kingdom expanded into much of India and Tibet, but then disintegrated into small principalities. During the reign of Jaya Bhim Dev Malla, an architect named Araniko took a team of 80 artists to China where they introduced the Pagoda style of architecture, a form that soon became popular in China and, eventually, throughout all parts of Asia. The later Malla dynasty, which commenced about the end of the 14th century, was concentrated in the Kathmandu valley. It was a period of considerable economic, social, and cultural development including the adoption of new methods of land measurement and allocation, the spread of Sanskritization (accepting behaviour that led to upward mobility within the caste system), and the construction of monuments that are now listed on the UNESCO World Heritage Sites. In 1484 CE, the Kathmandu valley was divided into three independent territorial principalities, which led to debilitating disputes and wars for territorial and commercial gains, facilitating the conquest of the valley by the Gorkhas (Wikipedia, 2022).

Modern

Gorkha king, Prithvi Narayan Shah (1768-1775), believed that unification of the three valley kingdoms was needed to restore and maintain political stability. After several victories by Prithvi, the king of Kathmandu sought help from the British, who arranged for the East India Company to send a contingent to support him. However, the Gorkha army defeated the British. Prithvi then captured Kathmandu and designated the city the royal capital of the Kingdom of Nepal. Prithvi’s success in bringing together the different religious and ethnic groups led to a period of relative prosperity in Nepal. Prithvi’s characterisation of the country as “a yam between two boulders” influenced the country’s foreign policy for the next few centuries (Wikipedia, 2022).

An initial period of expansion by Nepal into India and Tibet during the last quarter of the 18th century was followed by political and social turmoil. Rivalry between Nepal and the East India Company over states bordering Nepal led to the Anglo-Nepalese War (1814-16), following which Nepal was forced to cede considerable territory to the British. In 1846, the Rana family took control of Nepal from the Shah family and assumed the hereditary role of Prime Minister. The Rana pursued a policy of isolation, which helped Nepal maintain its independence during the British colonial era but, by denying itself the benefits of free trade and foreign direct investment, severely impeded the country’s economic development. Good relations between Nepal and Great Britain continued throughout the Rana period, with Nepal fighting with Britain in both World Wars and Britain supporting Nepal’s independence at the beginning of the 20th century (Miele, 2017).

After World War II, opposition to the autocratic Rana rule intensified, causing the reigning monarch, King Tribhuvan, to flee to India in 1950. This triggered an armed revolt against the Rana government, which culminated in a return to power of the Shah family, the emergence of political parties, and a period of quasi-constitutional rule. In 1960, King Mahendra declared democracy a failure, promulgated a new constitution that abolished political parties, and sought to consolidate his power by promoting the concepts of ‘One king, One Dress, One language, One nation”. Economic and social progress was made during the following decades, including the development of a more egalitarian society, land reform, the construction of the East-West Highway, and the eradication of Malaria. However, opposition to autocratic rule again mounted, aggravated by a souring of relations between Nepal and India which impacted severely on economic livelihoods, and in 1990 the king was forced to restore parliamentary democracy to the country. 

THE CURRENT ECONOMIC SITUATION

Overview

A country’s prosperity is measured largely by the level and evenness of its per capita income (PCY). In this article, income (Y) is defined as the gross product of a designated area, measured in terms of purchasing power parity (PPP). The evenness of the distribution of income is measured by the Gini index, with a value of 0 (zero) implying perfect equality (everyone has the same income) and a value of 1 (one) implying perfect inequality (one person has all the income). The Gini index is thus a measure of inequality – the higher is the index number, the greater is the inequality.

The PCY of a country is equal to gross domestic product (GDP) divided by population, and GDP in turn is equal to labour productivity multiplied by the work force. Hence, PCY is the mathematical product of labour productivity (V) and the ratio of the work force to the population (R).

PCY = V * R (1)

In 2020, labour productivity in Nepal was I$ 7,937 and the ratio of the work force to the population (the work force ratio) was 0.48. PCI was therefore I$ 3,810 (Table 1). This was 75% below the global average and 25% below the average in the low-income countries (LICs). Among the 229 countries on the World Factbook’s PCY ladder, Nepal was in 186th place

Table 1. Overview of Nepal’s Economic Situation, 2020

Source. CEA’s The World Factbook and Hooke & Alati’s Global Income Model. Notes. I$ refers to an international dollar – how much a US dollar would buy in New York in July of the indicated year. HICs, MICs, and LICs refer to High-Income Countries (PCY in 2020 above I$ 30,000), Middle-Income Countries (PCY in the range I$ 20,000-30,000), and Low-Income Countries (PCY below I$ 20,000), respectively.

Nepal performed better in terms of income distribution. Its Gini index was only 0.33, well below the global average and also below the averages in the high-, middle-, and low-income countries. The share of total income accruing to the poorest decile of the population was 3.2% in Nepal compared to 2.8% globally while the share going to the richest decile was 29.5% in Nepal compared to 31.2% globally (The World Factbook, 2022).

Labour productivity

The key determinant of a country’s PCY is the productivity of its work force. This can be analysed in terms of the productivity in each of the major economic sectors and the share of the workforce in these sectors.

V = a1VA + a2VI +a3VS (2)

where A, I, and S refer to agriculture, industry, and services, respectively; and a1, a2, and a3 are the shares in the total work force of the agricultural, industrial, and services sectors, respectively.

Table 2. Sources of Production, 2020

Source. CEA’s The World Factbook and Hooke & Alati’s Global Income Model.

Table 2 indicates that, in 2020, labour productivity in Nepal was lowest in agriculture, at only I$ 3,106. It was almost three times higher in industry and was eight times higher in services. Table 2 also identifies the sources of Nepal’s low relative productivity. First, productivity was well below the global average in each sector of the economy. It was especially marked in industry (mainly the processing of agricultural products such as pulses, jute, sugarcane, tobacco, and grain), where it was only 20% of the global average, compared with 45% in agriculture and 53% in services. Second, almost 70% of the workforce was in agriculture, the lowest productivity sector, compared with 31% for the world and only 3% for the HICs.

The workforce ratio

The workforce (to population) ratio is the product of the working age to population ratio (W) and the workforce to working age population ratio (X); the latter is what economists refer to as the participation rate.

R = W * X (3)

In 2020, the working age to population ratio for Nepal was 0.66 (Table 3). This figure was close to the corresponding global figure, with a higher proportion of the population in the 14 years and under age bracket in Nepal being offset by a lower proportion of the population in the 65 years and above age bracket. The work force to working age population ratio in Nepal, of 0.73, was also similar to the global ratio. Hence. Nepal’s work force to population ratio, of 0.48, was close to the corresponding global ratio. This indicates that demographics had little direct effect on the PCY of Nepal. The country’s low PCY can be attributed almost completely to low labour productivity across the three sectors and the concentration of the labour force in agriculture, the sector with the lowest productivity.

Table 3. Work force to population ratios, 2020

Source. CEA’s The World Factbook and Hooke & Alati’s Global Income Model

THE OUTLOOK

Table 4 shows estimates for 1950-2020 and projections for 2050-2100 of key population and economic variables for Nepal. Data for population in all years and for the work force in 2020 were derived from the websites of the United Nations’ Population Division and the US Central Intelligence Agency’s The World Factbook. Estimates of the work force for 1950 and 2000 and projections of the work force for 2050, 2075, and 2100 were made by the authors based on their understanding of the current situation in Nepal and data for countries and regions at comparable stages of demographic and economic development.

The key projections are for labour productivity. They are based on two main premises: first, that the global technology frontier will continue to move outward at its historical rate of about 1% a year; and second, that the mechanisms described in Convergence theory will cause most MICs and LICs to close their current productivity gap with the HICs during the remainder of this century (Hooke & Alati, 2021).

Convergence theory divides economic history into eras based on the dominant technology driving change. For example, using the classification developed by Graeme Snooks (1989), the first economic era was called the Scavenging era (3-2 million years ago - MYA), because the first humans (Homo habilis) were able to increase their living standard by adding scavenging to the foraging technology used almost exclusively by their predecessors, the Australopithecines. The Scavenging era was followed successively by the Hunting era (2MYA – 12,000 years ago), the Farming era (12,000 – 220 years ago, which was made possible by the end of a 100,000-year Ice age and the start of global warming about 3,000 years earlier), and the Industrial era (220-20 years) ago. We now live in the digital era. Convergence theory also divides each era into three phases (the breakaway, the catchup, and the fine-tuning phases) and economic agents into technology leaders and technology followers (See chart below). During the breakaway phase, the technology leaders develop and apply a new technology, which leads to growth of productivity and incomes. However, the technology is ignored by the followers who may not know about it, may not trust it, or may not know how to implement it. During this phase, a per capita income gap opens between the technology leaders and the technology followers. In the second phases, the catchup phase, the technology followers adopt the now mature technology and, because most of the early problems with the technology have been solved by the technology leaders, quickly close the PCY gap that developed during the breakaway phase. During the fine-tuning phase, leaders and followers merge and eke out the remaining benefits of the now-exhausted technology, with intense competition creating the conditions that lead to a new technology era.

The convergence model

 


As demonstrated by countries like South Korea and Singapore, when a follower economy is successful in making the transition to the catchup phase of convergence, it can close its PCY gap with the HICs quite quickly. The key is to secure the inward transfer of latest technologies. Experience shows that this can best be done by adopting (1) a policy of free trade, (2) a welcoming approach to inward direct investment, and (3) domestic policies that provide protection for property and personnel, especially of the foreign investors.

Nepal is potentially very attractive to foreign investors. First, as noted by King Prithvi Narayan Shah, Nepal is a small country located between two giants, China and India. China is already the largest economy in the world (in PPP terms, it passed the United States in 2014), and India should move into second place in the 2040s (Hooke and Kaur, 2022). China and India are huge sources of both technologies to boost production and markets to absorb this increased production. Second, Nepal has an estimated 42,000 MW of commercially feasible hydropower capacity, and could become a major exporter of energy, especially to India. Third, with its mountainous terrain, which includes Mt. Everest, the world’s highest mountain, the country’s rich cultural history, and its friendly population, Nepal has a wealth of attractions for high-income tourists. Fourth, Nepal has a generation of Millennials who are willing and able to access the best education in foreign countries. Nepal is the third largest source of foreign students in Australia’s higher education sector. The author has been teaching Economics and Finance courses to classes dominated by Nepalese students for the last six years and has been very impressed with their high ethical standards (perhaps reflecting the importance of religion in their culture), their diligence, their digital expertise, and their interpersonal skills. As in Ireland, Luxembourg, and Switzerland, young Nepalese graduates form a critical mass that could develop a large industry exporting high-value financial and other services, especially to neighbouring India where wages are currently much higher and are growing more rapidly.

Table 4. Performance and Prospects for Nepal, 1950-2100

Source. UN’s Population Division, CEA’s The World Factbook and Hooke & Alati’s Global Income Model.

The “most likely scenario” developed in the Hooke/Alati Model assumes that Nepal would move into the catchup phase of per capita income convergence in the 1930s. This would allow its per capita income to grow at an average annual rate of 4.6% during 2021-50 and 8.2% during 2051-75. In 2075, its per capita income would be only 10% below the global average and 20% below the average in the HICs. With the scope for benefitting from income convergence largely exhausted, the growth of per capita income would slow to 2.5% a year in the last quarter of the century.

CONCLUSION

Due mainly to political environment that has been inward-looking and unstable, and a terrain that is not well suited to farming and transport, Nepal is a low-income country. However, it has an abundance of resources that are valuable in a world where clean energy is scarce, high-income tourism is growing rapidly, and industries such as those providing sophisticated, online financial services are growing rapidly. If the political environment becomes more stable and policies are implemented that facilitate the inward transfer of latest technologies, Nepal should be able to move into the high-growth, catchup phase of economic development. Its per capita income could increase almost four-fold to more than $14,000 by 2050 and then rise 13-fold to about $200,000 by 2100.


REFERENCES

Bhattarai, K. (2009), Nepal. Infobase publishing.
Brinkhaus, H. (1991). The descent of the Nepalese Malla dynasty as reflected by local chroniclers, Journal of the American Oriental Society.
Hooke, A. and Alati. (2020), L. The economies of East Asia, in Emerging Business and Trade Opportunities Between Oceania and Asia, IGI-Global.
Hooke, A. and Kaur, H. Australia’s latest and most important trade agreement, Updating and Enhancing Content, Delivery, and Management, Smart Questions.
Pokhrel, N. (2017). The Licchavi and Kirat kings of Nepal, http://telegraphnepal.com/national/2014-02-19/the-licchavi-and-kirat-kings-of-nepal.
Shaha, R. (1992). Ancient and medieval Nepal (1992). Monohar Publications.
Singh, G (2008). Researches into the history and civilisation of the Kiratas, Gyan Publishing House.
Snooks, G. (1989). The dynamic society, Routledge.
Wikipedia (2022). https://en.wikipedia.org/wiki/History_of_Nepal.
Miele, M (2017). British diplomatic views on Nepal and the final stage of the Ch’ing empire (1910-1911). Prague Papers on the History of International Relations.
Britannica (2022). https://www.britannica.com/place/Nepal/History.


BIOGRAPHY

Angus Hooke is Emeritus Professor, Senior Scholarship Fellow, and Director of the Centre for Scholarship and Research (CSR) at UBSS. His earlier positions include Division Chief in the IMF, Chief Economist at BAE (now ABARE), Chief Economist at the NSW Treasury, Professor of Economics at Johns Hopkins University, and Head of the Business School (3,300 students) at the University of Nottingham, Ningbo, China. Angus has published 12 books and numerous refereed articles in prestigious academic journals.