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The ongoing political debate in Nepal, centered around a choice between a republic and a monarchy, has escalated over time. While discussions are confined to the political sphere, such debates have gained momentum as Nepal’s democracy fails to deliver meaningful economic results. Nepal’s economic performance is bleak, and a deep sense of injustice and powerlessness has prevailed among its citizens. When distrust erodes people’s faith in democratic institutions, demagogues are likely to surf on the wave of political and economic populism. Compounding these factors, the government’s procrastination in taking concrete steps to find long-term solutions to fix the underlying causes has only exacerbated the crisis.

The challenges enumerated above are consequences of a more profound force that has led to a presently dysfunctional system - a manifestation of the country’s pseudo-democracy. In Nepal, the conceptualization of democracy seems confined predominantly to its intrinsic value. However, the other instrumental facet of democracy, which serves as an effective means of socio-economic and political transformation, is inadequately realized. Consequently, a nuanced and timely discourse on this matter becomes imperative, as it can only positively impact people’s lives and eventually disperse crowds of illusions.

Short-termism of the financial sector

The pervasive short-termism in Nepal’s financial sector has diverted more finance into unproductive assets such as real estate and the stock market. An increasing emphasis on quarterly returns has crowded out long-term capital investment, and economic research and development. This narrow-minded approach not only impedes innovation, productivity, competitiveness, and job creation but also exacerbates the brain drain of youth, pushing them to seek opportunities abroad.

Who, then, is responsible for the wrongdoing? The nasty form of corporate governance has continuously tempered the economy, forgoing shadow alliances with corrupt politicians and bureaucrats who, in turn, share in illicit revenue. Such extractive institutional nexus has ruptured the interlinkage between the productive sector, job creation, and overall economic progress. The resultant frustration and anxiety among the general public are tangible, contributing to the prevailing discontent and fueling political and economic unrest in the nation. To foster genuine and sustainable growth, a shift toward responsible corporate governance and a recalibration of private sector priorities is imperative.

Slow or absent government

So far, the government’s action has been ‘too little, too late’, reflecting a reactive approach to addressing economic problems, often with detrimental consequences. Nepal’s economic problems are structural and, thus, need structural overhaul rather than short-term ‘jugaad’. For instance, the government needs to be reflective of the private sector's disinterest in long-term capital investment and its preference for trading rather than bolstering its manufacturing and service base. Why do investors continuously yell that the current economic structure demoralizes long-term capital investment and lament the government’s commitment to fixing it? The role of government transcends beyond merely revenue collection, market regulation, and correcting market failures. It must demonstrate a significant investment pledge in research and development and foster an environment where the private sector can operate with confidence and a sense of long-term commitment. This calls for a paradigm shift in how economic organizations are governed, how their relationships are structured, and how economic actors interconnect.

Low level of premature deindustrialization

With globalization, developing countries, including Nepal, witnessed a rapid shift from agriculture to the service sector, bypassing industry-led economic growth much earlier than the historical average. In his 2016 study, economist Dani Rodrik argued that premature deindustrialization could negatively impact economic growth through job loss and lower comparative advantage due to poor technology. An analysis of Nepal’s economic data (1975-2016) indicates that the manufacturing sector has shrunk, and there is a need to increase the share of manufacturing in national output and create jobs. Unemployment and economic frustration could trigger political instability and illiberal politics. Most importantly, only manufacturing can fill the vacuum of Nepal’s market gap of labor demand vs skill mismatch. It is especially true for the semi-skilled and unskilled labor force who outgrew agriculture but are ill-equipped for high-tech jobs. Reindustrialization is not an unavoidable fate and is essential for a change in the present economic structure to increase employment and bolster the production base. The question is how to design tools that help achieve this directionality with a purpose.

Democracy must deliver

The public’s desire for change resonates with their expectations for increased job opportunities, enhanced livelihood, and better public services. This collective aspiration has historically fueled the political call for democracy in Nepal. Over time, if democracy fails to deliver tangible economic progress, questions naturally arise on its appropriateness, leading people to explore alternative paths. While the intrinsic values inherent in democracy are significant, they alone are insufficient for sustenance. A democratic system must also demonstrate economic efficacy, delivering concrete economic results to win over citizens for more extensive support and credibility.

This means rethinking corporate governance where both government and the private sector adopt a mission-oriented approach for overcoming structural economic challenges. Only the government, with its unparalleled authority, holds the key to steering transformative change on a scale that can redefine the dynamics of economic progress and societal interaction. But, at present, the government itself requires reawakening. The current status quo is failing too many people; therefore, a delivery-centered democratic reorientation is only a long-term solution to public dissent.

The author is a public policy candidate at Willy Brandt School in Germany. He has served as a research officer at the Office of the Investment Board Nepal. He can be reached for comments at [email protected]

For several years, physical infrastructure development has moved to Nepal’s policy agenda due to its higher economic and social multiplier effect in addressing development challenges. Globally, the development of transport, electricity, and telecommunications infrastructure is found to have a significant positive impact on Gross Domestic Product (GDP). Intriguingly, growth impacts are higher in developing countries compared to developed countries. However, infrastructure development in Nepal has primarily remained a political rhetoric, and poor infrastructure governance sharply contrasts with the country’s target to achieve middle-income status by 2030. This juxtaposition between aspiration and infrastructure deficit calls for a paradigm shift—where infrastructure development is intrinsically intertwined with evidence-based growth policies for economic takeoff.

Development backlog

Nepal remains one of the world’s least urbanized yet rapidly urbanizing countries, which means an ever-increasing demand for road, energy, and ICT infrastructure. According to the World Bank, Nepal must invest 10-15 percent of its annual GDP until 2030 to maintain present GDP growth. But statistics present a glaring disparity in road density, ICT, energy reliability, and consumption infrastructure.

From 2011 till 2018, Nepal’s strategic road network increased from 11,636 kilometers to 13,447 km, a mere increase of 2000 km in six years. Notably, the 15th periodic plan has set an ambitious target to expand national highways above two lanes to 3,000 km by 2043/44. Presently, road connectivity is poor, and it has significantly discouraged international trade and FDI, inflated transportation costs, and limited economic and public services access. Studies also indicate a bi-directional causality between road infrastructure and economic growth, complementing each other.

Also, we are confronted with a paradox when we assess Nepal’s ICT infrastructure. On the one hand, mobile phone penetration has surged to an impressive 130 percent, painting a picture of connectivity on the rise. On the other, Nepal’s position in the Network Readiness Index is 112 out of 131 economies, signaling a shortfall in digital connectivity, technology access, and overall readiness of the economy and society to benefit from digital advancement. 

Despite initiatives like the Digital Nepal Framework, the development and use of ICT infrastructure in easing and economizing business and public service delivery remains far from satisfactory. A vast digital divide persists in terms of availability, accessibility, and reliability, given the current state of digital infrastructure.

Unlike road and ICT, the energy landscape has improved with electricity access to 89.9 percent of the population after development of new hydropower projects. But poor distribution networks remain a bottleneck resulting in intermittent power outages and energy shortages. Furthermore, World Bank statistics reveal Nepal’s energy consumption is meager 144 kWh per capita, which is significantly lower even by the South Asian benchmark of 694 kWh per capita. As a result, only 35 percent of the total population has access to clean fuels and technology for cooking. A juggernaut task, therefore, is twin-sided, i.e., not just enhancing distribution infrastructure but also ensuring higher consumption driven by increased access to clean technologies for household use.  

Developmental challenges

Nepal’s policy discussions have often centered around the availability of financial resources for infrastructure projects. While it’s a fact that Nepal faces a financial shortage when it comes to executing massive projects, the crux of the infrastructure deficit lies in the nation's poor infrastructure governance. Over time, Nepal’s projects have been subject to political influence, often bypassing rigorous and systematic approaches during the ideation and preparation phases. The lack of due diligence and institutional capacity raises concerns about a project’s credibility, leaving investors skeptical about its bankability and potential return on investment. Numerous projects have eventually transformed into ‘white elephants’ or encountered time and cost overruns, including prominent projects like the airports in Pokhara and Bhairahawa, along with the Kathmandu-Tarai Fast Track.

Additionally, Nepal’s rugged terrain is compounding these challenges, which demands substantial financial and technical resources for developing large-scale infrastructure projects—resources that Nepal currently lacks. Collaborations with neighboring countries for project development also face additional challenges on geopolitical fronts, further complicated by political dynamics. In the face of such hurdles, a resource-constrained economy like Nepal’s finds the realization of projects increasingly daunting, and poor infrastructure development remains a constant reminder of these barriers.

An engine for growth

The impact of infrastructure remains different given a country’s level of development and economic structure. Due to the multiplier effect, developing physical infrastructure in African countries was associated with 1.3 percent higher economic growth than in Southeast Asian countries. Although Nepal lacks adequate research on the economic impact of infrastructure, its impact has been witnessed in terms of improved living standards after access to such infrastructure. For instance, despite poor digital infrastructure, the ICT sector generated more than 66, 000 jobs, contributed 1.4 percent to GDP, and 5.5 percent in foreign earnings. Given Nepal’s poor development indicators, such a high multiplier effect is certain through road and energy infrastructure. 

Furthermore, Nepal must refer to striking economic differences between Latin America and Southeast Asia, where the unavailability/inadequacy of physical infrastructure slowed growth by 1-3 percent in the long run. Furthermore, it led to a noticeable one-third disparity in output per worker compared to their Southeast Asian counterparts. Such insights remain vital for Nepal to enhance business competitiveness and bolster economic growth. The tangible impacts are more evident as infrastructure leads to positive spillover on local market creation, increased employment opportunities, and improved peoples’ livelihoods.

Aspiration to transformation

With increasing growth aspirations, Nepal's demand for infrastructure shall mount, creating an uneasy situation for policy stakeholders. But the central question is how the government will ensure sound infrastructure governance and strategically interlink with economic growth and development. Findings from the McKinsey report estimate 15-35 percent of the project cost can be reduced with improvement in infrastructure governance. In Nepal’s context, it is essential that the government distance itself from investing in ambiguous projects failing to demonstrate long-term socio-economic benefits. Secondly, sufficient investment should be made in project identification, preparation, and structuring to streamline service delivery. 

Lastly, policy should equally focus on extracting maximum benefit from existing infrastructure through upgradation to break Nepal’s poor infrastructure-economic backwardness trap. In a nutshell, neglecting the development of power, transport and telecommunications infrastructure at this critical juncture risks putting Nepal on an irreversible path of regression by taking a toll on GDP.  

The author is currently a public policy candidate at Willy Brandt School in Germany. He has served as a research officer at the Investment Board Nepal