27 September 2025
With a per capita income of USD 1,470, Nepal is classified as a lower-middle income country, making it a member of a large group of 108 countries with per capita incomes ranging from USD 1,316 to USD 13,935. This is a remarkable achievement for Nepal as over the last two decades the country has experienced a steady rise in per capita income.
The World Bank categorises its member countries based on per capita income into three groups: low income, middle income, and high income. This classification is determined by gross national income (GNI), which encompasses both gross domestic product and income earned abroad by citizens. As of 2024, 25 countries were designated as low-income, 108 as middle-income, and 80 as high-income. Due to the broad scope of the middle-income group, it is further divided into lower-middle, middle, and upper-middle income subgroups. Nepal is classified within the lower-middle income category, a group that includes 50 countries distributed across regions from Asia to Latin America.
The income classification holds several policy implications for developing countries. Multilateral development banks use this classification to determine eligibility for grants and concessional loans. Additionally, the classification affects terms of access to export markets as multilateral trade rules allow for preferential market access for low- and middle-income countries. While income classification is commonly used, it has limitations, as income is only one aspect of development and doesn’t capture its full complexity. Still, rising income remains a key indicator because it strongly affects other dimensions of development such as health, education, and quality of life.
The 2024 World Development Report (WDR), titled ‘The Middle-Income Trap’, addresses a significant discourse in economic development: that development progresses through identifiable stages, each requiring a distinct set of policies and capabilities. In essence, the opportunities accessible and the necessary competencies to leverage them differ between lower-income and high-income countries. Lower-income nations must develop the capacity to adopt existing technologies to produce goods and services and drive robust economic growth, whereas high-income countries—already operating at the technological frontier—must focus on innovation. The report observes that only a small number of countries have successfully transitioned from middle– to high–income status, and provides recommendations on escaping the ‘middle–income trap’.
This essay analyses Nepal’s rise from low- to lower-middle-income status, highlighting persistent challenges in building lasting productive capacity. Economic policy debates in Nepal tend to emphasize technical solutions over institutional reform. It argues that adopting an institutional perspective is essential for more effectively managing the factors critical to the success of the nation’s productive sectors.
Nepal’s Gross National Income
In 2024, Nepal’s GNI was USD 44 billion, more than twice the USD 21 billion in 2012 (Figure 1). During the same period, net primary income that contributes to GNI quadrupled from USD 151 million in 2012 to USD 704 million in 2024 (Figure 1). Remittances (money Nepali migrant workers send home from abroad) is driving the growth in these indicators, increasing from USD 4.8 billion in 2012 to USD 14 billion in 2024.
Figure 1: Gross National Income per Capita (left axis) and Net Primary Income
(right axis)
There is growing evidence that remittances have increased household income in Nepal, and that in turn has helped reduce poverty and lifted households’ well-being. A study finds that a one-unit increase in remittances leads to a 0.89 unit increase in consumption, a 1.25 unit increase in imports, a 0.32 unit increase in investment, and a 2.14 unit increase in gross national product (that is, every 100 rupees coming in as remittance leads to 89 rupees being spent on consumption, and so on). Remittances are also helping in the preservation of natural resources such as forests as households shift towards non-wood alternatives for construction and cooking. Notwithstanding, evidence is also emerging on the negative impacts such as on agricultural productivity while remittances have not compensated for the loss of labour.
The Middle-Income Trap
According to the WDR 2024, many middle-income countries experience periods of slower economic progress, a phenomenon often called the ‘middle-income trap’. To overcome this trap, these countries need to transition from growth driven by investment to embracing new technologies, and ultimately, fostering innovation within their own borders. Since 1990, only 34 countries have advanced to high-income status, and projections suggest that most low- and middle-income countries will face decelerating growth as they near the leading edge of the global economy by 2100.
Nepal’s own aspiration to get rich sits precariously. The transition from low-income to middle-income was driven by labour migrating to economies where they could be more productive and earn wages that were multiples of what they could receive at home. The income sent home as remittances lifted households’ well-being. Decades of public effort and investment in health and education as well as reforms that increased individual freedoms have undoubtedly contributed to making Nepali workers productive abroad.
While labour migration has always been part of Nepal’s history, the last two decades have brought some important changes. For one, migration is happening on a much larger scale, with people from different regions and backgrounds seeking jobs abroad. Each month, about 65,000 young Nepalis are estimated to head overseas for work. These migrants are increasingly choosing countries that offer higher pay; although India was once the main destination, the bigger wage gap in places like the Middle East and Southeast Asia makes those regions more attractive now. A large portion of their earnings is sent back home using formal banks, boosting Nepal’s foreign currency reserves and supporting more domestic financial activities. Though still limited in scope, Nepali workers are finding jobs in a wider variety of sectors abroad, helping to build business networks, introduce new ideas, and open up investment opportunities in Nepal.
But this migration–remittance model of economic development has its limitations. In comparing the wages of bus drivers in Delhi and Stockholm, economist Ha-Joon Chang argues that wages are not a function of individual skills alone. If that were the case, the bus driver in Delhi would be more handsomely compensated as he has to negotiate with more complex vagaries of the Delhi traffic. Institutions play a vital role, including by determining who can enter and participate in the labour market. Seen from this perspective, growth in the wages of Nepali workers happened because they moved from Nepal’s low-income economy to an upper-middle-income or high-income economy. But in order to further increase income, either the skills of Nepali workers need to increase so they can move to better paying jobs overseas or they will have to move to countries that pay even higher wages for the same skills set. Both of these options face hurdles.
Increasing the skills of Nepali workers and moving to better paying jobs might be possible for some, but given that citizens in destination countries will want these better paying jobs it is unlikely to be available for large numbers of migrant workers. The wage difference between upper-middle income and high-income countries for low-skilled workers is likely to be marginal, and the formal routes for temporary migration is limited. A likely possibility is that the current trend continues, and Nepali workers’ wages rise with economic growth in destination countries. What is difficult to predict is whether the destination economies will go through structural economic change and the demand for low skilled, temporary workers will diminish. At any rate, the migration–remittance bonanza of the last two decades may not last forever, and then what?
Pathway for economic development
Countries typically transition from poverty to prosperity through sustained productivity growth, often driven by manufacturing. Some countries have experienced rapid increases in income through the export of commodities. Nepal’s situation is analogous in some respects as its accelerated income growth is primarily attributed to labour exports rather than to commodities such as oil or gold. However, global demand for labour varies considerably from that for commodities.
In their paper, ‘What you export matters’, Ricardo Hausmann, Jason Hwang, and Dani Rodrik provide evidence that a country’s economic growth can be influenced by the composition of its produced and exported goods. The identification of efficient and profitable production and export methods by entrepreneurs can result in broader economic effects, such as attracting additional business activity and increasing productivity. Although the current rise in protectionism poses challenges to export-led growth strategies, there remain opportunities that countries such as Nepal can still leverage. But what we observe is that even when there were ample opportunities for Nepal to export, it failed to sustain it, as discussed below.
Nepal has struggled to develop its productive sectors, prompting many workers to seek better jobs abroad. Manufacturing, crucial for job creation, has declined, with its GDP share falling from 8.5 per cent per cent in the 1990s to 4.3 per cent in 2024. Foreign direct investment remains below 1 per cent of GDP. As the manufacturing sector contracts, exports have declined to 7.6 per cent per cent of GDP—a level comparable to that observed in the 1960s (Figure 1). In the 1990s, Cambodia and Nepal were at similar development stages. Currently, Cambodia’s exports account for 71 per cent of its GDP, and its foreign direct investment is 9.4 per cent.
Figure 2: Nepal’s Exports as a Share of GDP
Nepal’s policy discourse regarding growth strategies has primarily concentrated on technical solutions as demonstrated by the country’s numerous development plans. Notably, the fundamental development challenges and required actions have been recognised since at least the 1950s, when experts in Nepal initially explored methods for achieving sustained economic growth. Nevertheless, the expected outcomes have remained elusive. As the economist Douglas North observed, if economic growth depended solely on efficient resource allocation, progress would be assured. In Nepal’s context, the significant influence of institutions—comprising the rules and norms that shape political, economic, and social interactions—tends to be undervalued in consideration of growth strategies.
Substantial evidence indicates that inclusive institutions foster broad–based prosperity, whereas extractive institutions primarily serve the interests of a limited group. For instance, Daron Acemoglu and James Robinson highlight this by comparing Nogales in Arizona, USA with and Nogales in Sonora, Mexico: despite similar geography and culture, the American town’s inclusive institutions foster higher quality of life, whereas the Mexican one’s extractive institutions lead to inequality, lower incomes, poor services, and corruption.
Tragedy of the economic commons
The growth of industries in Nepal has largely been facilitated by preferential market access to high-income countries. For instance, the carpet industry benefited from the Generalized System of Preferences, which provided Nepali exports with duty-free or reduced tariffs in US and European markets. Similarly, the Multi-Fiber Agreement (1974–2005) afforded Nepal’s garment sector preferential entry into the same two markets. Following the 2015 earthquake, the US granted special trade preferences to Nepal (scheduled to end in December 2025). As Nepal transitions from least-developed country status, some of these trade benefits will be phased out, while others will persist. Nevertheless, competition is expected to intensify as more developing nations seek access to the same markets.
History shows that periods of increased production in Nepal have spurred rapid economic growth and job creation, but these improvements have not lasted. For example, carpet exports peaked in 1990 at 3.3 million square metres and employed up to 300,000 people, comprising 65 per cent of exports; today, carpet exports have dropped to just 12 per cent of that peak. The garment sector followed a similar trajectory, with significant growth in the 1990s followed by a sharp decline.
Most analysts attribute the failure of the productive sectors in Nepal to take off to policy instability and inconsistencies as well as the high costs of production associated with being a landlocked country. The decade-long Maoist conflict also exacted a heavy toll on the productive sectors. But from a broader perspective, the role of institutions may offer an even more pertinent explanation for the recurring boom-and-bust cycles in Nepal’s economic activities.
A common, but understudied reason seems to be the failure of Nepal’s products to maintain quality and meet international standards. For instance, Nepal’s carpet and garment lost access to lucrative export markets because they could not uphold required labour standards. Often in pursuit of short-term profits, some businesses cut corners on quality, but in doing so, they undermined the reputation of the entire industry and jeopardized long-term growth prospects. As the country’s sustained long-term prosperity is tied to the performance of the productive sector, which in turn critically depends on preferential access to markets of rich economies, we should revisit how such benefits are managed.
I propose they be viewed as a ‘shared asset’ or a common pool resource, possessing two characteristics—non-excludability and rivalrousness. Although uncommon, the reason preferential market access could be viewed as a shared asset is because it is challenging to exclude any Nepali firm from the tariff advantages extended to the country. And the actions of individual firms using this preferential market access can have significant ramifications for the broader industry; in particular, the reputation associated with the ‘Made in Nepal’ label becomes a collective responsibility. When certain firms prioritize short-term profit by compromising on quality, they risk undermining the collective reputation of all Nepali products. But with few, if any, restrictions, firms have little incentive to uphold high standards, potentially harming the reputation of all Nepali products. Therefore, if Nepal aims to develop an economy capable of generating sustainable, higher-quality employment and improved living standards, preferential market access must be administered collaboratively—as a shared asset that delivers enduring prosperity to a broad segment of society, rather than benefiting only a few in the short term.
At present, the responsibility for managing quality and standards of Nepali products for export rests mainly with the government standards and compliance bodies. Recently, some private companies have begun offering services such as quality control, inspection, testing, and certification. However, a purely top-down approach entailing government regulations are not entirely effective as they lack transparency and accountability. Meanwhile, a purely market–driven approach risks getting captured by large firms, stifling competition and innovation.
Drawing on Elinor Ostrom’s work on managing a common resource pool, including in Nepal, a poly-centric approach may be more effective. This would involve a network of actors—government bodies, private companies, industry associations and chambers of commerce as well as non-government organizations that advocate for Nepal’s trade interests. Together, they could share the responsibility for maintaining standards, certifying compliance, and protecting the collective reputation of ‘Made in Nepal’.
Conclusion
Nepal has progressed to a lower-middle income country, largely because of remittances from migrant workers. Given the limitations posed by the migration–remittance model of economic development, Nepal will need to revisit its productive sectors to generate jobs, sustained income growth and prosperity. Institutional weaknesses have contributed to the boom-and-bust cycles in Nepal’s productive sectors in the past but have received relatively less attention.
As export markets, in particular those offering preferential access, will be critical for building the economy’s productive capacity, we should view them as a shared asset or a common pool resource, and manage them as such. Moreover, given the integral relationship between Nepal’s productive sectors and the prosperity of its population, relying solely on either government intervention or market forces may not constitute a prudent approach. Nepal’s success in managing other common pool resources, such as forestry, should provide inspiration for a renewed public dialogue on economic policy and growth strategies.
The author wishes to express gratitude to Bimbika Sijapati-Basnett and Sudyumna Dahal for their review of the earlier draft and their valuable insights. The views expressed are the author’s personal.
