Image: Joshua P Jacks
There are few countries where doing nothing has paid off as handsomely as in Nepal. In the face of civil war, natural disasters, pandemics and political upheaval, the economy has not only endured but, in many ways, flourished. This peculiar feat has little to do with domestic policy and everything to do with the millions of Nepalis who left. Their absence, and more importantly their earnings, explain much of its unexpected rise toward lower-middle-income status in 2020 (a World Bank classification that denotes countries with a gross national income (GNI) per capita between $1,136 and $4,465). If growth were measured in fortitude, the country might have outpaced its peers. But as it stands, the country’s economic ascent owes more to Gulf-bound aeroplanes than to ground-level reform.
Its recent economic history falls neatly into three periods, each less coherent than the last. The first, from 1996 to 2006, was defined by a bloody Maoist insurgency that left over 13,000 dead and much of rural Nepal paralysed. The second, from 2007 to 2014, brought peace but little political stability. The monarchy fell, but the republic that replaced it stumbled through years of legislative deadlock. The third phase, from 2015 to 2023, was an alphabet soup of shocks—earthquake, blockade, landslide, pandemic—all overseen by a revolving door of prime ministers. Through it all, the economy grew at an average of 4.2% a year. That performance is less impressive when compared with its peers. Bangladesh and Cambodia raced ahead. Even Kyrgyzstan outpaced it. Nepal, to its credit, stayed afloat.
Remittances were the lifejacket. Since 1996 more than 6.6m Nepalis—equivalent to nearly a quarter of the current population—have received labour permits to work abroad, mostly in the Gulf and Malaysia. Their paychecks kept the economy ticking. Remittances rose from 7% of GDP in the conflict years to nearly 25% in the most recent period. The money fuelled consumption; stabilised the balance of payments; and propped up rural households. Private consumption became the engine of growth, rather than investment or exports. In effect the global labour market outsourced Nepal’s poverty reduction.
The numbers tell a story both admirable and awkward. Real GDP tripled between 1996 and 2023, but output in its aspirational peers—Cambodia, Moldova, Laos—rose fourfold. GNI per capita rose 7.3% a year, more than Bolivia or Kyrgyzstan but still lagged behind the pace of Moldova and Cambodia. That is down to its slower population growth—1.2% a year—which magnified per capita gains. A demographic dividend also helped, as the share of working-age citizens increased while dependency ratios fell. For now this bonus acts as a tailwind. But the wind will not blow forever.
In poverty terms the story is rosier. Extreme poverty, defined by the World Bank as living on less than $2.15 a day, has virtually disappeared. In 1996 more than half the country fell below the threshold; today fewer than half a per cent do. Even under the higher $6.85 benchmark, poverty has halved. Here again remittances deserve credit. More than 30% of the fall in poverty since 2011 is attributable to money sent home from abroad. Rural families in particular have seen higher spending, better nutrition, greater resilience to shocks. Migrants earn triple what they would at home and can support their families through health crises, job losses and natural disasters. During covid-19 migrant households were noticeably less distressed than those dependent on domestic work.
This resilience, however, comes with costs: some already visible, others deferred. Remittance-fuelled growth has concealed structural weaknesses. It has enabled governments to neglect job creation; industrial policy; and infrastructure investment. The labour market remains anaemic, more so for the young and educated. Public spending on social assistance is a meagre 1.6% of GDP with most of it channelled through categorical schemes that favour the elderly or disabled. When the pandemic hit the country lacked the digital infrastructure to deliver direct cash transfers. Emergency support reached only 2% of households, compared with nearly 20% in neighbouring countries.
Nor does the reliance on migration scale indefinitely. A future brain drain looms if higher-skilled Nepalis, frustrated by limited opportunities and political inertia, opt for permanent emigration. The median age of migrants is 28. Most are male. The longer this pattern persists, the more it risks distorting the domestic economy; weakening the social fabric; and reinforcing gendered inequalities. Moreover countries that host Nepali workers are beginning to tighten labour policies or prioritise automation. The golden goose may yet lose its passport.
The country’s vulnerability to climate change further clouds the outlook. Ranked as the 10th most affected country on the Climate Risk Index, it faces frequent floods, landslides, heatwaves and erratic monsoons. More than 80% of its population is exposed to climate-induced hazards. Agriculture remains rain-fed and fragile. Urban planning is haphazard. Infrastructure is unresilient. The costs of inaction, both human and economic, will mount quickly.
Yet the temptation to muddle through remains strong. As long as remittances continue to flow the state faces little pressure to act. Reform is hard; exporting workers is easier. The federal system, introduced in 2015 with much fanfare, has delivered more bureaucracy than better governance. Fiscal federalism has yet to deliver real devolution. Provincial governments tend to act as intermediaries for patronage rather than engines of service delivery.
To catch up with structural or aspirational peers, the country would need to accelerate its GNI per capita growth above historic trends. But projections suggest that even in the best-case scenario, reaching upper-middle-income status will take another two decades. And that is without narrowing the gap with countries like Laos or Cambodia, which have already left Nepal behind.
Nepal’s success is both undeniable and incomplete. It has improved living standards and avoided the worst effects of numerous disasters. But it has done so by exporting its people and importing their incomes. This model has lifted millions, but it is unlikely to lift the nation. Remittances can finance survival. They cannot substitute for strategy. So long as the state remains content to ride the wave of migration, its journey toward prosperity will be prolonged and perpetually offshore. ■
