ILLUSTRATION: ALBERTO MIRANDA
ON MARCH 5TH Nepal’s voters did something unexpected. They threw out the dynastic politicians who have treated the country as their personal fief for generations and handed a sweeping mandate to the Rastriya Swatantra Party (RSP), an outfit that did not even exist four years ago. The new lot campaigned on disgust with the old rot: the corruption, the nepotism, the paralysis. They promised to get Nepal moving. They will form a government with enough seats to govern alone, a rare and precious thing in Kathmandu’s fractious politics.
Now the hard part begins. The RSP inherits an economy that has squandered a generation of opportunity. Growth has lagged peers. Jobs are scarce, forcing hundreds of thousands of young Nepalis to seek work abroad each year. Remittances prop up consumption but do little to build productive industry. The new government talks of a manufacturing push; of luring foreign investment; and of creating decent work at home. The instinct is sound. The question is how. And on that, the global record provides a graveyard of good intentions.
The appealing narrative is that industrial policy merely requires picking winners and showering them with favours. Many Nepalis assume their government is just too feeble to try. The truth is more troubling. When feeble governments do try, they tend to pick the wrong tools, waste scarce money as well as entrench the very cronyism voters just ejected. The RSP’s trouble is not to do industrial policy. It is to do industrial policy that works in a poor, landlocked country with limited fiscal room and even scarcer administrative talent.
A new report from the World Bank offers a useful guide. It does not pretend there is a universal recipe. But it does lay out what kind of policies fit which contexts. The crucial distinction is between tools that tackle market failures directly and those that take a costly and indirect route. For a government with Nepal’s constraints, that distinction is everything.
Start with what Nepal should not do. It cannot afford splashy subsidy programmes that need deep pockets and sophisticated oversight. Consumer demand subsidies, of the sort rich countries use to promote electric vehicles, are out: they demand fiscal space Nepal lacks and mostly benefit the well-off anyway. Local content requirements, which force foreign investors to buy from domestic suppliers, sound tempting but have a miserable record. They raise costs for final goods producers, invite retaliation and tend to leave everyone poorer—as Indonesia is learning with its nickel-processing push, where productivity has suffered even as headline value-added figures rise.
Nor should Nepal reach for import tariffs as a crutch. The infant-industry argument is seductive but the evidence is brutal. Tariffs punish consumers, raise costs for exporters who need imported inputs and insulate favoured businesses from competition. Colombia’s recent attempt to protect textile makers with tariffs merely taught importers clever new ways to cheat. South Africa’s tariff regime in the 2010s let less productive firms feast while dynamic ones starved. Nepal’s market is too small to absorb those inefficiencies; they would just strangle growth.
What then can a new government with limited bandwidth actually do? The answer lies in public inputs that solve coordination problems without breaking the budget. Industrial parks are the classic first-choice tool. They do not need endless subsidies. Governments can auction land; lease it to private developers; and let them operate the parks as businesses. Ethiopia spent over $1bn on state-owned zones with mixed results; Costa Rica let the private sector take the lead and built a thriving high-tech hub. Nepal should study that contrast.
Skills training is another priority that need not drain the treasury. Costa Rica again shows the way. When Intel considered investing there in the 1990s, it worried about a shortage of trained technicians. The government did not write a blank cheque. It worked with Intel to design tailored courses at existing institutes, then waited until the firm committed before sinking money into specialised programmes. That is the opposite of the build-it-and-they-will-come fantasy that has littered developing Asia with half-empty zones.
Market access assistance matters too. Nepali firms struggle to navigate foreign quality standards and certification requirements, a problem the Pakistan surgical-instruments industry knows well, where compliance with European rules can cost €200,000 upfront. Export promotion programmes that bundle counselling, trade missions and matchmaking have worked in Peru, Uruguay and Tunisia. They require competence and not cash.
The core lesson is about humility. Governments cannot know which firms will conquer global markets. What they can do is create the conditions for competition to sort winners from losers. That means making subsidies available to all comers in a sector, instead of hand-picking favourites. It means forcing firms to export; so they must prove themselves against world prices. It means sunset clauses that cut off support after a decade unless productivity is clearly rising faster than in unsubsidised industries. These disciplines are the only guard against industrial policy sliding into crony capitalism.
The RSP swept to power on a promise to break with the past. Its leaders are young, educated and untainted by the old parties’ baggage. That gives them a sliver of credibility that no recent Nepali government has enjoyed. But credibility is a wasting asset. If they fill the policy vacuum with the same old fantasies—tariffs that shield the inefficient; subsidies that enrich the connected; mandates that strangle the dynamic—they will merely prove that the old rot was not in the dynasties but in the system itself. And Nepal will have squandered its last best chance. ■
