Nepal has almost everything it needs for prosperity: A strategic location, tourism potential, hydropower and a young population. Yet, we are trapped in a vicious cycle of low growth and high migration. When the Constitution was finally promulgated two decades after the launch of the Maoist People’s War, we expected politics to be our salvation. Unfortunately, it has become our prison.

Nepal's low-growth, high-migration trap isn't just an economic phenomenon—it's a political protection mechanism that preserves an unsustainable kleptocracy and crony capitalism. While the World Bank calls for a “systematic assault” on economic barriers, what Nepal needs is a paradigm shift that will fundamentally transform power relations and dismantle extractive networks.

Without such a shift, emerging political agency and a growing structural crisis will create a rupture.

The absence of comprehensive political and economic reforms is a matter of serious concern for Nepalis. It does not just affect our graduation to a middle-income status, which has already been pushed behind schedule; it also impacts the lives of millions of people and determines Nepal’s development trajectory.

The trap

Since the World Bank's initial analysis in 2017, Nepal's “low-growth, high-migration trap” has deepened.

According to the World Bank, low-growth fails to generate employment. As a result, a large number of youth are forced to migrate. Migration brings in remittance, enabling consumption but no productive investment. High remittance not only creates economic distortions, but also reduces pressure on the top leaders to deliver reforms. The lack of reforms, in turn, reinforces low growth.

Despite poverty reduction, Nepal has been growing at only about 4 percent, marginally better than the 2 percent growth achieved in 2023. At this rate, Nepal will be unable to graduate from LDC at least until 2030.

Nepal’s economic trends and fiscal positions are becoming increasingly unsustainable, creating pressures for change. For example, budget execution rates are below 80 percent, revenue collection is dwindling, capital expenditure is low, and the debt service burden is rising.

While the per capita income remains at around $1,400, limiting job creation, the manufacturing sector’s GDP share has shrunk by half since 2008. While migration is increasing, fiscal indicators are worsening. Our dependence on migration is growing. While public debt is about 44 percent of the GDP, our revenues are shrinking. Debt servicing and financial management consume almost 20 percent of the budget, while development expenditure has shrunk to 19 percent and is poorly executed.

Political agency

The kleptocracy, patronised by top political leaders, extracts power and money from the people and the state. In doing so, they misuse state power, distort its bodies and hollow out legal institutions. Despite this, political agency has failed to drive change.

Institutions like the World Bank have been advocating comprehensive reforms. For example, they want to break policy barriers, build new growth sources, revitalise agriculture, address migration issues and unleash financial reforms. These reforms would make the economy more competitive, productive and broad-based.

All of these recommendations directly impact the existing extractive system dominated by crony capitalism, kleptocracy and political parties. Initiating changes would mean changing the status quo, which is why these suggestions fail.

The failure of new parties to put pressure on traditional parties has not helped. When the Rastriya Swatantra Party (RSP) emerged just before the 2022 elections, it was largely driven by the aspirations of migrant workers. However, the ethical dilemma posed by evidence of corruption of RSP’s founder has dented the party’s aspirations.

When the current coalition was forged, one of the objectives was to deliver results to the people to show them that there was no need for new parties. This strategy has failed. However, the new parties have met the same fate, ultimately benefiting the entrenched leaders.

One of the results of this mismatch between people’s expectations and political delivery is the reluctance of people to identify themselves with a political party. Rather, the disenchantment and dissatisfaction echo in social media in fragmented ways. Activism has not worked because people have become distrustful of not only political parties but also activists who claim to represent civil society.

Incremental reforms?

There are enough people who believe that incremental reforms in the economy will add up and drive change. Some people are also hopeful that the traditional parties are feeling the pressure and will reform, albeit slowly. Then there are others who think we must seek alternatives to the current political system. Many of them tout China as a model of growth and aspire to have “political stability.”

None of these approaches will work, unfortunately.

Traditional solutions offered by donors and development partners often fail because they cannot address political-economy factors and political dynamics. These solutions focus on the symptoms rather than the root causes. Incremental reforms are often absorbed by the system, with all its deformities. And when the reforms are significant, the kleptocracy swiftly neutralises the attempts.

For a few years, the traditional political parties could create the illusion of change, but all that the superficial democracy did was maintain the status quo. The current political system is rooted in extractive kleptocracy because the parties need each other to survive. Reforms will undermine the sources of political power and wealth. Therefore, political reform is impossible without disrupting the existing political power models.

The current political malaise has discredited the whole democratic system. Seeking an alternative to the democratic system, however, is not an option. According to renowned economists, democracies perform at least 20 percent better than non-democracies in delivering prosperity. Democracies can also deliver more investment, economic reforms and public goods.

A likely rupture

Yes, the emergence of new political forces has faltered. Yet, this is only a temporary blip. At least four quarters are pressing for transformation in our political and economic system: the migrant population, urban youth, a traditionalist nationalist force allied with the former monarchy and a liberal-minded civil society.

Even if political agency and social movements have failed to produce well-thought-out political movements, structural factors will continue to push for change because the status quo is untenable, and it is little prepared for shocks that may come from unexpected quarters.

New structural pressures are building: Demographic transition creates new demands, digital transformation rearranges political psychology and regional economic integration forces competitiveness. Demographic pressures, economic vulnerabilities, migration impacts and urbanisation pressures will continue to generate strain until the status quo breaks.

Our hope is that political agency and the structural crisis will align so that we are able to manage the transformation in a meaningful way. Otherwise, instability and chaos will become unavoidable.