What is keeping Nepal poor?

Having spent the past 70 years following the Soviet system of centralized planning, diligently adopting dominant development discourses, concepts, and jargon as the development mantra, and producing uncountable pages of diagnostics on the problems and challenges faced by every sector of society, Nepal still ranks as one of the poorest nation-states.

Thus the multibillion-dollar question asked by Nepali citizens, ever-growing panels of national and international experts, and jet-setting consultants is: Why is Nepal poor?

Three dominant narratives

Fatalism, aid dependency, and corruption are the three factors usually put forward in attempts to explain the underlying obstacles to Nepal’s march toward modernity in general and economic growth in particular.

The notion of Bahunbad (Brahminism) as the crux of the chakrai (sycophancy), afno manche (kinship) and bhagyabad (fatalism) that bedevil Nepalese society and hinder modernity is still a dominant narrative to explain Nepal’s poverty – thanks to the efforts of late anthropologist Dor Badhur Bista. Brahmins are the highest of the four Hindu castes.

The experiences of Southeast Asia, China and Bangladesh challenge the thesis of social norms and culture being the key barriers to economic growth. For instance, Confucianism was blamed up until the 1950s for the underdevelopment of China and South Asia by Western thinkers. However, Il SaKong, South Korean minister of finance in the 1980s, instead attributes Confucianism as a precursor to the South Korean economic miracle. He writes in his 1993 book Korea in the World Economy that the concept of respect and allegiance to central leadership played in favor of the effective functioning of the executive presidency that South Korea adopted in the 1950s.

Books by Nepal’s foremost public intellectual Dr Devendra Raj Pandey contain the central argument that aid dependency has degraded domestic decision-making for the benefits of the donors and their interests. Pandey is right to point out that the relief nature of foreign aid that Nepal has been a receipt of is one of the reasons for low domestic capital formation. The recent exception to this trend is the US$500 million Millennium Challenge Fund Compact by the United States.

On the other hand, the changes in social indicators such as school enrollment, pre- and postnatal health, and inclusion in political structures could be attributed to foreign aid. As a result, Nepal is far ahead of India in the Global Inclusion Index compiled by the World Economic Forum.

Another factor regarded as the main culprit for lack of economic development is corruption. The standard survey to compile the Global Corruption Index by Transparency International is based on respondents’ perceptions about corruption in delivery of public services.

However, such perceptions do not adequately explain why Nepal has not been able to grow rapidly. If corruption is the single variable to explain Nepal’s lackluster growth in the past decade, what explains the rapid economic growth of near-peer Bangladesh in recent years?

Pivot to growth and decline

History provides an excellent framework to assess Nepal’s cycle of economic boom and bust. These cycles are very extended, lasting for centuries. The cycle of prosperity and growth lasted for many centuries, against two centuries for poverty and deprivation.

Nepal was a historical link between the vast  Gangetic plain and the Tibetan Plateau – and for that matter mainland China. According to a study conducted by Nepal’s Institute of Foreign Affairs, the country’s position as an important center of trade began with a rise of a powerful Tibetan kingdom around the 7th century AD and lasted until 1904. Nepal cemented its place as a premier entrepôt during the Malla kings in the Kathmandu Valley from the 12th to 17th centuries. Nepal’s dominant role in the trade with Tibet ended with a bilateral agreement between British India and Tibet.

The rise of the Newar ethnic and indigenous group in the Kathmandu Valley as a high merchant class began during this period. The Newar merchants had a special privilege to trade in Tibet for an extended period until Tibet was “peacefully liberated” by China in 1953.

According to a groundbreaking study by economic historian Angus Maddison, China and India accounted for around half of the global gross domestic product for 15 centuries, and their GDP remained somewhat constant during this period. Nepal’s GDP in 1820 – nearly five years after the country suffered a humiliating defeat at the hands of British India – was around 30% less than that of India and 50% less than China’s.

China and India, however, began to register a decline in their foreign trade and economic heft around 1850 when imperial Britain started consolidating its positions in the vast South and Southeast Asia region. The period of economic decline of China and India closely followed the First Industrial Revolution and the emergence of coal as the dominant source of energy. The hand-produced cotton textiles from India and silk textiles from China faced stiff competition from the mass-produced British and European textiles. The development of steam-powered ocean-going fleets and navigation in the high seas during this period superseded the traditional land-based trade routes, of which Nepal was very much a part.

The Asian century and Nepal

Singaporean ambassador-at-large Kishore Mahbubani has called the economic and political declines of China and India for nearly 200 years as “historical aberrations.” Indeed, it has been estimated that China and India between them will account for nearly 50% of global economic production after 2050. The period between 2025 to 2030 will be the tipping point when China and India take up the mantle of the first and third-largest global economies, leaving the current leader, the US, in second place.

The early phase of industrialization in China – which started with the opening up in the 1970s – did not make much impact on Nepal because of its concentration in the coastal area. The transportation system within China was not reliable enough to ensure that the goods transported from the coast were delivered year-around, as they had to pass through the vast and desolate Tibetan Plateau. However, with a railway now operational on the plateau and a second line under construction between Tibet and mainland China, the prospect of Nepal reconnecting to China’s vast supply chain has emerged – at least in theory.

Similarly, Nepal’s access to the ports in India is through overland routes only. However, discussions on the use of India’s internal waterways to connect to the Bay of Bengal, and the proposed cross-border railway line between Kathmandu and Raxaul in the Indian state of Bihar, could herald a new phase. The new phase could be observed in terms of reducing logistics costs, which are the reason Nepal is not competitive compared with the coastal regions of India and Bangladesh.

After a long hiatus of nearly 200 years, there is a theoretical potential for Nepal to link itself with the supply chains of India and China, and receive its share of the “sunset industries” that are being relocated from China.

The road ahead

What will it take for poor and landlocked Nepal to benefit from the shift of global economic power into its neighborhood? In short, it must invest in connectivity to the outside world in general and India and China in particular. This includes maintaining and building new cross-border roads to connect with India and China. Nepal must find a way to benefit from the Indian investment in its internal waterways, a new option to reduce the time and costs of reaching the Bay of Bengal. Even a marginal reduction in logistics costs will support Nepal in its pursuit of industrialization and an increasing export base.

Nepal must decide which side of history it wants to be on and decide on strategic transportation projects accordingly. The question is not how the cross-border rail lines will be financed but rather whether Nepal is willing and determined to connect itself to the global supply chain and reduce the overall costs of freight transport.

My take is pretty apparent by now: The underlying causes of Nepal’s low economic growth are not culture, donor dependence, or corruption, but the high cost of logistics that makes the country unattractive for mass investment and creation of employment opportunities.

It’s the high logistics cost that makes Nepal poor – not other petty issues as we have been made to believe.