Factors Affecting Nepal’s Economic Development

Economic development is a frequent slogan of contemporary society, especially in the less developed countries. It is an integrated process in which all the sections of the society are expected to actively participate and cooperate. It is not only concerned with economic but also with many non-economic factors. Non-economic factors may be scientific advancement, capacity to invest, the number of children and household size. Meanwhile, the economic factors may be the availability of economic resources, capital formation and productive resources. United Nations Research Institute for Social Development has developed a list of economic and socio-demographic indicators of economic development. The economic indicators include agricultural production, electricity consumption, foreign trade including import and export and transport and services available to the society as a whole as well as per capita. Under the socio-demographic indicators, infant mortality rate, the expectation of live birth, doctor-patients ratio, crude birth rate, literacy rate of the society, available housing facilities and a number of telephone users per thousand population are included (cited in Raj, 1988). According to Prof. Cairncross- “Development is not just a matter of having plenty of money but is it purely an economic phenomenon. It embraces all aspects of social behaviour the establishment of law and order, scrupulousness in business dealings, including with the revenue authorities, relationships between the family literacy, familiarities with mechanical gadgets and so on.” Since economic development is closely associated with a human endowment, social attitudes, political condition and historical accidents, only economic attributes are not sufficient for development. Political, psychological, social and cultural requirements are equally important for development (Jhingan, 1986).

The development process of an economy mainly depends on the economic factors such as natural resources, infrastructure, monetary and fiscal policy, agricultural and industrial development and so on. But these factors are not sufficient for the rapid economic development of a country. The development process is affected by human endowment, socio-cultural and political condition, organizational pattern, and administrative system as well. It is important to know that these factors are not independent but tend to reinforce and influence each other. However, a detailed study in a particular factor is needed to suggest policy interventions in which a particular country should pay attention to growth and prosperity.

Nepal’s Economic Development Scenario

Nepal started its planned development effort in 1956 and now has an experience of 56 years. The country has achieved remarkable progress in the areas such as road, irrigation, drinking water, information and communications, literacy and life expectancy. However, in terms of economic growth, the progress is not satisfactory. The economic growth rate, a major indicator of economic development, is not at the desired level. Achieving a double-digit growth rate has been a dream due to various underlying impeding factors. The energy crisis has been a major constraint for economic development affecting all aspects of life and economic activities. Given this background, this paper discusses the following economic and non-economic factors which affect the economic development of Nepal.

Nepal's Economic Development


Economic Factors

 Natural Resources

Natural resources such as land, forest, minerals, climate and water resources are determining factors in the pace of economic development. The composition of land and its fertility, availability of minerals and water resources all have a greater role in development. Generally, a country which has sufficient natural resources will be fortunate to develop its economy rapidly. For example, Australia has abundant land leading to comparative advantage to produce commodities such as wool, mutton and wheat. Similarly, Nepal can specialize in the utilization of water resources and can earn a huge amount of foreign currency. Forest fire, uncontrolled grazing, the export of boulder, illegal collection and export of non-timber forest products and use of forest area for other purposes are seen frequently in the forest sector (Three Year Plan, 2010/11

  • 2012/13). Furthermore, investment in mineral resource development in Nepal is almost negligible. So, Nepal has failed to optimally utilize its natural resources.

Capital Formation

Capital formation is another important factor for the development process. The process of capital formation passes through different phases – saving, a financial institution for the mobilization of saving and investment in capital goods are basic requirements of capital formation. Establishment of financial institutions in the remote and backward areas to collect capital and to invest in the productive sector through desired channels is an urgent need of developing countries like Nepal. Establishment and expansion of such institutions can help the development process through mobilizing financial resources. It is also equally remarkable that one-fourth of the population lives below the poverty line whose propensity to consume is high leading to almost nil saving. Even the affluent segment of the society may not have a strong motive to save and invest, particularly in contemporary Nepal. Financial resources are either hoarded or invested in unproductive sectors such as purchasing gold, jewellery or investing in the real state. Furthermore, money is frequently used to meet the cultural and social requirement to maintain a higher status in society. Unproductive consumption among the affluent group has also created constraints in saving and investment. So, to increase income and saving, the government should launch programs targeting lower income group in the society through saving incentive mechanism. Low-interest rates on bank deposits, increase in consumption pattern, high rate of inflation and limited financial access especially in rural areas are the major problems in mobilizing savings towards productive channels.

 Size of Market and Foreign Trade

The market size affects productivity since the large size of markets allows firms to produce in large scale. In the era of globalization, the international market has become a substitute for the domestic market. There is empirical evidence showing that open trade is positively associated with development. The perfect market competition both at domestic and foreign markets are important for driving the market efficiently and thus enhancing business productivity by ensuring the production of goods and services by the most efficient firms. Recent Financial Crisis, 2008 is evidence of high degree of interdependence of the economies worldwide. Specialization and division of labour increases productivity. This also helps large scale production. Both agricultural and industrial development
is impossible in the absence of division of labour and specialization. The market with small size does not provide the incentive to the division of labour, specialization and also to the large scale production. Nepal is facing this problem due to the small domestic market. The share of export and import in total foreign trade remains 14.1 per cent and 85.9 per cent respectively (MoF, 2012). In the same way, the trade balance is one of the major challenges of development in Nepal. A large amount of foreign currency has been needed to import consumer goods rather than in investment and capital formation.

Physical Infrastructure

Extensive and efficient infrastructure base is an important requirement for ensuring the effective functioning of an economy. It shapes spatial allocation of economic activities and sectors of activities can develop in a particular economy. Well-developed the infrastructure reduces the effect of distance between regions, integrating domestic market and connecting it at low cost to the markets in other countries and regions. Furthermore, the quality and extensiveness of infrastructure significantly impacts economic growth and reduces economic inequalities and poverty in a variety of ways. A well-developed transport and communication infrastructure network and power supply is a basic requirement for access to the core economic activities. Telecommunication network helps for a rapid and free flow of information, which increases overall efficiency by helping to ensure that business can communicate and decisions are made by economic actors taking into account all available relevant information. Physical infrastructures are mostly concentrated in an urban area compared to the rural area. So, effective modes
of transport such as roads, railways, ports and air transport enable entrepreneurs to get their goods and services to market in a secure and timely manner and facilitate the movement of workers to the most suitable and profitable jobs. Furthermore, due to lack of free flow of interregional transportation, apple in Jumla has damaged while we are importing large quantities of such fruits from our neighbouring countries. Regular supply of electricity helps to run the business and factory regularly and contributes for efficient production.

Agriculture Development

Agriculture sector contributes more than one third to Nepal’s GDP. More than two-thirds of its population depend on it for their employment. However, the government has failed to ensure smooth supply of fertilizer, seed, pesticides, provide agricultural loan, research and extension services, etc. to farmers. The agricultural research and extension programs have so far failed to reach the large majority of farmers. High cost of borrowing from financial institutions also affects agriculture. The agriculture sector has not been modernized. Irrigation facilities are provided in a very limited area to dampen agricultural production and productivity. Further, land reform has been made an agenda of political parties only in the time of election to reach in power.Industrial Development

Industries play an important role in the economic development of a country. Nepal has low development of medium and large scale industries. The share of contribution of this sector in GDP is 14 percent only. Even small scale industries are not well developed due to lack of raw materials and insufficient financial resources. They are also facing market competition due to the liberal policy adopted by the government. This is the reason why more people are concentrated in agricultural sector though it is less productive. Poor industrial relation between industrialist and labor is the main hindrance for industrial development. Lack of clarity in legal provisions, unavailability of appropriate technology for quality product, weak linkage with market and lack of confidence of
entrepreneurs are major problems faced by the industrial sector.

Monetary and Fiscal Policy

The monetary policy of a developing country also plays a crucial role in the development process by affecting the costs and availability of credit, by controlling for inflation and maintaining equilibrium in the balance of payment. Monetary policy is an important tool to maintain price stability by adjusting money demand and supply. An imbalance between the two will reflect in the price level-inflation or deflation of money supply. In the development process of an economy, the demand for money increases due to monetization and an increase in agricultural and industrial production. Furthermore, monetary policy can help to narrow down the balance of payments deficit through a high rate of interest. A higher interest rate may attract foreign investment and may help in bridging the balance the payment gaps. A high-interest rate policy is also anti-inflationary by discouraging borrowing and investment for speculative motive and in foreign currencies. It also promotes an allocation of scarce resources in more productive channels. Fiscal policy should be oriented towards public spending in basic infrastructure to generate more employment and income. However, the scenario of capital expenditure has not increased as desired. Some construction works are done by the end of the fiscal year only to comply with the formality.

Non-economic Factors

Human Resources

Manpower is an active source of production and development. But the pace of development depends on the quality, capacity and skills of existing manpower. Well educated and trained people have better skills and higher efficiencies required for the production process. It is equally important to create qualified and trained manpower.
For this, investment on social services such as health, education and training is needed. Due to the lack of vocational education and training, Nepal’s human resource is not fully fit for the rapid economic development. The present globalizing economy requires well-educated workers who are able to adapt with changing environment and the evolving needs of the production system. Enhancing secondary and tertiary enrollment rates as well as the quality of education is an urgent need. The extent of staff training is also taken into consideration because of the importance of vocational and continuous training which is neglected in our country. Crude theoretical education alone cannot meet contemporary needs. Social attitude towards education seems to be unfriendly to economic development. Purely academic education provides knowledge only for non-clerical jobs. It is preferred to technical and vocational education in developing counties due to prejudice against manual work. This is also the reason why developing countries are technically backward and educational institution whether primary, secondary and tertiary are regarded as the factory to produce unskilled and unemployed manpower. Nepal is not an exception in this case.

Public Administration

The sound administrative system is another key requirement for the economic development of a country. The weak administrative structure is a severe bottleneck for development. Administrative procedure and excessive regulatory burdens hinder the investors to invest. Official delay, red-tapes and corruption, dishonesty in dealing with public contracts, lack of transparency and trustworthiness, and the political dependence of the judicial system impose significant economic costs to business and slow down the pace of development. Inefficient administration creates impediments to sustainable socio-economic development. Lack of effective mechanism to discourage irregularities and the direct interference of political parties on administration are major problems prevailing in administration. Furthermore, official delay and corruption may hinder plan and project implementation dampening the pace of development in Nepal. A stable, strong and efficient administrative mechanism is seemed equally important for the implementation of development planning. Economist Lewis thinks about a strong, competent and incorrupt administration as the first condition for the successful planning. Most developing countries are facing difficulties in development due to a lack of efficient and reformed administration. The institutional environment is determined by the legal administrative framework within which individuals, firms and governments interact to generate income and wealth in the economy. The role of sound and fair institutional environment has become even more apparent during the period of economic crisis, given the increasing role played by the state in the economy. Improved public sectors delivery with good corporate governance will minimize costs and support the development process.


Entrepreneurship is another economic factor of development. An entrepreneur can organize and optimally allocate all other factors of production. He/she bears the risk and uncertainty and earns profit from production. They have to forecast the demand and supply of products and other factors affecting the price situation. Entrepreneurial ability in developing countries is not much strong due to outdated technology, the small size of market, capital deficiency, lack of skilled and trained manpower and lack of sufficient and quality transportation. The growth of advanced economies such as Japan, United Kingdom and the United States of America is the result of the entrepreneurial ability of producers in the respected countries. Entrepreneurs could combine all other factors of production from domestic and international markets and forward the production process in optimum scale and also calculate demand more precisely. As a result, the economy was rapidly developed. Nepal has low development in entrepreneurship. Entrepreneurs are not interested to bear high risk, seek short-run projects, invest mostly in less productive portfolios and have a low level of confidence due to prolonged political transition. To develop entrepreneurial ability in Nepal, the government must facilitate entrepreneurs in several ways. There should be created an appropriate environment to encourage the entrepreneur to participate in economic activities. To improve existing institutions, market imperfection should be removed. Similarly, monopolistic institutions should be controlled and must create a competitive environment. Rules and regulations are introduced to run entrepreneurial
activities without disturbances. Similarly, skilled and qualified manpower such as technicians, managers and administrators should be developed. Financial institutions should be established to facilitate entrepreneurs.


Technology is another element for competition. The economy should adopt modern technology available in the global market. The average cost of production will be higher due to the technological backwardness. It also results low productivity of capital and labor. Nepal is also facing problems of low productivity. Nepal is still using outdated and orthodox technology especially in rural area which has made the development process too slow and more costly. Even in urban areas, the producers use highly labor-intensive technology due to lack of financial resources. So, the adaption of modern technology in production is absolutely necessary for the betterment of the economy. Foreign direct investment (FDI) plays an important role could be a major source of foreign technology.

Geographical and Climatic Condition

Geographical and climatic condition is another economic factor of development. Every country cannot produce all the required commodities due to geographical and climatic conditions. For instance, Brazil has a suitable climatic and geographical condition for the production of coffee while Bangladesh does so for jute. Due to spatial variation,
Nepal can specialize sheep farming in the Mountain region, horticulture and fruit farming in the Hill region and food crops production in the Terai region.

Social Values and Attitudes

The development process largely depends on attitudes, norms, values and institutions existing in the society. Such values and attitudes motivate the social behavior. Changes in social attitudes, values and institutions depend on the perception of the society. On the one hand, the dynamic society seeks new discoveries and inventions and ultimately changes are witnessed. For this, economic freedom is equally important. Such freedom provides people to involve and seek new economic activities. Industrial revolution is an example of the dynamism of European society. On the other hand, rigid religious attitudes do not support modern economic development. Religious beliefs hinder the process of discoveries and inventions. Such attitudes and beliefs have no incentive to work hard and get more return. Such a social system doesn’t seek higher living standard and future security. Furthermore, such society has a deep belief on traditional customs and pays a lot of time, energy and money during festivals and ceremonies. Nepalese culture is also rooted in discriminations based on caste and gender. Gender issues are interwoven systematically into the basic social structure of Nepalese society, as are other cultural values. The traditional religion and culture which are not supportable for development should be modified accordingly. For this, education and training should be provided for favorable environment of development. Therefore, social values, attitudes and institutions should be motivated to create an environment and to prepare a base for economic development. Better education and training help to increase knowledge which further helps self-discipline, power to think rationally, to know new techniques of production and to save and invest for the future. Such environment helps to create and promote business activities. We have to provide technical and vocational education to Nepalese youths to get better and technical jobs and high remuneration in international market.

Political Factors

Political factor is another key element for development. Political stability creates a favourable condition for the implementation of plans and projects. The rapid economic growth rate of the developed countries is one of the examples of political stability. Foreign investors in developing countries do not feel security and at the same time lose their confidence in the absence of investment friendly environment due to political instability created by unstable government. Frequent changes in the policies and programs due to unstable government adversely affect investment-friendly climate. Due to lack of sufficient capital for investment in the domestic market, most of our resources are either unutilized or underutilized. Therefore, a stable political environment is an important requirement for strong and stable government. Such a government can provide an appropriate direction to the development process by ensuring stable and sustainable economic policies and programs. Such an environment can built up confidence and security of their investment to the investors. This is the urgent need of the developing country like Nepal where we have to use our natural resources properly.


Various factors are responsible for the rapid growth of an economy. Both economic and non-economic factors directly and indirectly affect development process of a country. If we optimally utilize our natural, human, financial and physical resources, double-digit growth rate is also plausible. For this, political commitment is equally important. Policymakers must be confronted with management challenges. There should be well-established democratic institutions and promotion of transparent, responsive, participatory, inclusive and accountable governance system and systematic plan. A mechanism should be in place to operationalize political consensus, policy consistency and continuity in major national strategic issues among political parties. Furthermore, the investment-friendly environment should be fostered in the priority sectors. The high inflation should be controlled to stop further deterioration of welfare. The unemployment problem should be solved by increasing employment opportunities. There should provide sufficient and reliable energy supply to tackle the electricity crisis. Furthermore, the development process must have a domestic base. People should be conscious and committed to development. Foreign aid should not be accepted as a major source of finance and should only be used as a supportive source. Both internal motivation and resource utilization pattern should be made as the basic source for sustainable economic development. Japan had developed its economy without sufficient natural resources while Sri Lanka has developed the economy even in the post-conflict situation. Similarly, strong and competent administration and committed government are considered as the basic requirements of rapid economic development of Nepal.

  • Jhingan, M.L. (1986). International Economics. India: Konark Publishers Pvt. Ltd.
    Ministry of Finance (2012).
  • Economic Survey Fiscal Year (2011/2012), Government of Nepal.
  • National Planning Commission (2010) Three Year Plan Approach Paper (2010/11-2012/2013)
    Government of Nepal.
  • Raj, H .(1988). Fundamentals of Demography. India: Surjeet Publications.
  • Subedi, B.K. (2006). An Introduction to Economic Development and Planning. Kathmandu:
    Vidyarthi Pustak Bhandar.
  • World Economic Forum (2010). The Global Competitiveness Report 2010-2011: Geneva

Sources:  प्रशासन पत्रिका सामान्य प्रशासन मन्त्रालय ( वर्ष ४४ अंक ३, २०७० असार )

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