In 1990, Nepal restored multiparty democracy and embarked on a period of economic reform. Over the next five years, the economy grew by an average of 5.1 per cent a year—faster than in any sustained period since—with industry contributing close to a quarter of that growth and exports climbing toward a peak of more than 25 per cent of GDP. Nepal appeared to be at the beginning of a broader structural transformation.
That trajectory was interrupted. The Maoist conflict began in 1996 and ran for a decade. A political transition then took a further nine years, concluding with the new constitution of 2015—the same year an earthquake killed nearly 9,000 people. Reconstruction was still under way when COVID-19 closed borders in 2020. Of the three decades after 1995, Nepal spent ten years in armed conflict, nine more in constitutional transition, and much of the remainder recovering from major shocks.
Figure 1. Investment and GDP Growth in Nepal, 1990–2024
Nepal’s economy nonetheless kept expanding. Growth stayed positive almost every year, real income per person rose substantially, and poverty fell. These gains make the following question worth asking: how much better off might Nepal be today if the growth momentum of the early 1990s had continued?
The short answer is that the difference could have been large. Nepal’s real GDP per person was about USD 1,180 in 2024. Had the economy simply continued growing at its early-1990s rate, the figure would have been about USD 1,562, and under a somewhat stronger illustrative path, about USD 2,087. These are not forecasts or precise estimates of the cost of the conflict and other disruptions. They are benchmarks showing how small differences in annual growth accumulate over decades.
Measuring what did not happen
We cannot rerun history. There is no second Nepal that avoided the conflict but was otherwise the same, so the cost cannot be observed directly. What can be done is narrower: take the rate at which the economy grew before 1996, extend it forward, and see where it leads. The exercise is arithmetic rather than attribution. It shows what a sustained difference in growth can do over 30 years.
Three scenarios organise the exercise. Scenario 1 is what actually happened. Scenario 2 extends Nepal’s 5.1 per cent average growth rate from 1990–1995 forward. Scenario 3 starts at the same rate but adds an extra percentage point a year, to illustrate part of the investment and productivity gains that greater stability might have supported. The distance between the paths shows the scale of the long-run difference under alternative assumptions about growth.
How the two counterfactual lines are calculated
Scenario 2: Nepal’s real GDP is assumed to grow by 5.1 per cent every year after 1995.
Scenario 3: Nepal’s real GDP is assumed to grow by 6.1 per cent every year after 1995.
Both start from the same 1995 GDP level. GDP per person is calculated using Nepal’s actual population in each year.
Scenario 1: What actually happened
Growth slowed to about 4.0 per cent a year during the conflict, recovered to 4.6 per cent afterwards, and averaged about 4.1 per cent over 2015–2024. Across the period since 1996, growth averaged roughly 4.2 per cent. But the growth rate alone misses an important part of the story: the composition of Nepal’s economy also changed.
Industry lost momentum
Industry contributed about 1.18 percentage points to annual growth in 1990–1995. During the conflict, its contribution fell to 0.68 points and remained subdued afterwards. Services continued to drive most growth, while manufacturing’s share of the economy declined—growth without the industrial deepening seen in many of Nepal’s comparator economies.
Investment is part of the explanation. During the conflict, private investors held back and development spending weakened as security pressures rose. Investment later recovered strongly, but a large share went into reconstruction and capital-intensive hydropower rather than a broad manufacturing expansion.
Hydropower offers a concrete example of how Nepal lost its momentum. Nepal holds one of the largest generation potentials in South Asia, and by 2024 had developed only about 4 per cent of it. India has developed 29 per cent of its own, Pakistan 17 per cent. The obstacle was never simply physical destruction. Financing constraints, an outdated legal framework, transmission bottlenecks, and slow project implementation all held hydro projects back, and industrial firms lived with scheduled loadshedding from 2007 until 2018. Half of all firms were running their own generators by 2012. One estimate puts Nepal’s annual GDP at around 7 per cent higher over 2008–2016 had there been no loadshedding. Political instability leaves an economic legacy not only through assets destroyed, but also through investments delayed or never made.
Remittances protected households, but domestic production lagged
At the same time, Nepalis went abroad to work in very large numbers. By 2023, more than one in 14 Nepalis was living outside the country and remittances had grown to about a quarter of GDP, among the highest shares in the world. The effect on households was substantial and positive: remittances helped pay for food, school fees and housing, and played a major role in Nepal’s poverty reduction.
But a large share of the additional demand was met by imports, limiting how much of the remittance boom translated into stronger domestic production. This is the central feature of Nepal’s growth story. The mechanism that protected Nepali households through the conflict is also the one that allowed the economy to expand without building productive capacity. Incomes rose; the capacity to produce did not. Workers left agriculture, as they do in every developing economy, but moved into lower-productivity services—or abroad—rather than into manufacturing.
Scenario 2: What if the pre-conflict trend had continued?
The first scenario makes the more conservative assumption: Nepal simply continues growing at the 5.1 per cent annual rate it had already achieved in 1990–1995. It assumes no new reform breakthrough and no acceleration beyond that earlier pace.
Put in everyday terms, 5.1 per cent growth means that farms, factories, hotels, shops, and transport companies together produce about 5 per cent more each year than in the year before. Political stability would not have guaranteed this. But it can make investment easier to sustain: roads and irrigation projects are more likely to be completed, businesses more willing to buy machinery, banks more comfortable making long-term loans.
The difference between 4.2 per cent and 5.1 per cent appears negligible. In any single year it would be imperceptible. But growth compounds. A gap of about one percentage point does almost nothing in the first year and little by the fifth; sustained across three decades, it becomes decisive. Growing at 5.1 per cent rather than 4.2 per cent since 1995 would have left Nepal’s economy roughly a third larger than it is.
Scenario 3: What if stability had also supported faster investment and productivity?
The second scenario is somewhat more ambitious. It starts with the same 5.1 per cent pre-conflict growth rate and adds one percentage point a year, bringing growth to 6.1 per cent. The extra point is intended to capture part—not all—of the gains that stronger public investment, private investment, and productivity might have generated under greater political stability and policy continuity.
Comparable economies suggest the figure is not far-fetched. Over Nepal’s conflict decade, the countries the World Bank groups as Nepal’s aspirational peers—Cambodia, Lao PDR and Moldova—grew at an average of 5.9 per cent a year. Nepal managed 4 per cent.
The 1-point adjustment is also cautious relative to Nepal-specific evidence. In their 2005 paper, Asian Development Bank economists Sungsup Ra and Bipul Singh estimated that the decline in development spending associated with the conflict could reduce annual GDP growth by about 1.7 percentage points under their conflict scenario and 2.1 points under a higher-conflict scenario. Their model captures only one channel: it does not fully incorporate the costs of destroyed infrastructure, displacement or disruptions to economic activity. Nearly 400,000 rural families were displaced during those years.
Their explanation also helps make the mechanism concrete. Public investment can affect private investment directly, by providing roads, power and other infrastructure, and indirectly by shaping expectations about future business conditions. When development projects stall, firms may become less willing to commit their own money. International evidence points the same way: development economist Paul Collier and his colleagues put the average growth penalty during civil war at a little over 2 percentage points a year, while economists Valerie Cerra and Sweta Chaman Saxena find that output losses from wars and other major shocks are often not fully recovered even after the immediate crisis ends.
Under the 6.1 per cent path, GDP per person would have reached about USD 2,087 by 2024, around 77 per cent above the actual level. Nepal would not necessarily have grown at exactly this rate. But the point here is to illustrate how even a modest, sustained improvement in growth can produce a very different economy over a generation.
What the scenarios show
By 2024, the three paths stand this far apart:
| Growth path | Annual growth assumed | GDP per person, 2024 | Difference from actual |
|---|---|---|---|
| Actual | Observed | USD 1,180 | — |
| Scenario 2 | 5.1% a year | USD 1,562 | About 32% higher |
| Scenario 3 | 6.1% a year | USD 2,087 | About 77% higher |
The gap between the paths does not appear suddenly. It opens gradually and widens as the annual growth differences accumulate. Expressed in time rather than money, Nepal would have reached its 2024 income level around 2017 on the Scenario 2 path and around 2013 on the Scenario 3 path.
Figure 2. Nepal’s Income Level Under Alternative Growth Paths (2024)
For regional context, Cambodia’s GDP per person in 2024 was about USD 2,183. Nepal’s actual level was about 54 per cent of that figure; the Scenario 3 level would have been about 96 per cent. Cambodia followed a different history and development model, so the comparison is illustrative rather than causal. It simply shows the scale of the income gap implied by the scenarios.
What the exercise does and does not show
These paths do not prove that the entire gap was caused by the Maoist conflict or the political transition that followed. Both counterfactuals are smooth, so they also abstract from the earthquake, the pandemic, changes in the global economy, and other shocks that a stable Nepal would still have faced. Scenario 2 is therefore best read as the more conservative benchmark and Scenario 3 as a more ambitious one, not as strict statistical lower and upper bounds.
What the exercise does show is how prolonged disruption can leave an economy on a lower path long after active violence ends. Missed investment today means fewer roads, machines, and skills tomorrow. The effect can persist even after growth resumes.
The lesson is about the future as much as the past
Nepal’s recent history is not only a story of lost opportunity. Households adapted, remittances protected consumption, and poverty fell. But resilience is not the same as transformation.
The counterfactual suggests Nepal’s central challenge lies in sustaining the conditions under which investment, productivity, and domestic production build on one another: political stability, policy continuity, and a business environment in which firms can plan beyond the next crisis. Protecting development budgets when budgets come under pressure is part of this, for the reasons Ra and Singh identify—it is also a way of protecting private investment.
The past cannot be relived. But the arithmetic of compounding works in both directions. Just as lost momentum accumulates, so do the gains from steady reform and productive investment. The choices made now will shape not only next year’s growth rate, but the size and structure of Nepal’s economy a generation from today.
The views expressed in this article are the author’s personal reflections.
