In 1975, an average Nepali, Chinese, and Indian had the same income. Since then, during the course of the last 40 years, what happened in these three countries is incredible. The income of a Nepali has slightly more than doubled, while that of an Indian has doubled twice and that of a Chinese has doubled five times. Today, an average Nepali has an annual income of $735 ($2 a day). An Indian has an income of more than two Nepalis and a Chinese has an income of 10 Nepalis.

At the pace of annual per capita income growth of 2.2 percent over the last 40 years, a Nepali would achieve the income of today’s Indian in 30 years, and that of a Chinese in 105 years. This is a disturbing divergence in living standards between Nepalis and its neighbours.

Because of this uneven performance, Nepal, already a tiny economy vis-à-vis its neighbours, is shrinking rapidly in relative terms. Measured by total income generated in the country, Nepal is now 1 percent of India and 0.2 percent (yes, one-fifth of one percent) of China, a fall from 1.2 percent of each in 1975. A country’s relative size impacts its status and negotiating power.

Growth diagnostics

This has been the story so far: on the one hand, our two neighbours—two great civilisations, with vastly different cultures, history and institutions—continue to thrive, taking up larger global economic space, while on the other hand, Nepal, which has always been a historical link between them, is painfully falling behind. Although we must celebrate our neighbours’ success, the current scenario is regrettable for us. The onus is on Nepal to establish itself as a vibrant, mature, respectful, and articulate nation.

Economic growth of China and India did not happen overnight and it certainly did not happen due to foreign grants. It was made possible through political dedication to better public policies that focused on creating jobs and developing a market to encourage the private sector to engage in foreign trade and investment.

Except for being landlocked (which matters for growth) and relatively small in size (which may or may not, the jury is still out), other growth factors were not very different for Nepal compared to China and India. All the three countries were endowed equally with natural wealth and industrious people. Save some drag on growth because of geography, it was variation in public policies that has made all the difference in the last 40 years.

Thus, only Nepal holds the key to its development—introducing the right set of public policies. But its growth potential very much depends on what type of economic relation it develops with China and India. The availability of Chinese and Indian markets can help accelerate Nepal’s growth in the same way international markets have helped the growth of the two. But if Nepal fails to take both its neighbours into confidence, even the growth potential that Nepal’s domestic market provides will be impeded. Therefore, China and India should hold a prominent place in Nepal’s economic growth policies.

Building partnership

A paradigm shift in Nepal’s economic diplomacy is essential to induce China and India to play a positive role in Nepal’s growth. Nepal’s policy focus should shift from its historical quest for Chinese and Indian grants to making inroads into their markets and attracting their capital, technology and ideas. A lot hinges on whether Nepal can gradually make this courageous switch.

The tendency to ask for handouts is convenient. But the experience of Nepal and the world has taught us a valuable lesson that unless it is rebuilding war ravaged or disaster-hit communities and infrastructure, no country can achieve prosperity through foreign cheques.

The path of wining markets and attracting foreign capital is a long and arduous one, requiring sweeping structural and policy reforms. But it is the only way to foster sustained growth in the long run and, in turn, avoid being marginalised and earning respect in the neighbourhood. Good diplomacy and foreign policy help, but they can never be a substitute for economic strength.

If Nepal can put its act together, it has enormous opportunities right on its doorsteps. If Nepal can supply only 0.5 percent of Chinese and Indian imports, it would require two-thirds of Nepal’s total production. Imagine the job creation and economic growth this success would bring about. Given the present state of its economy, it is hard to even imagine that Nepal can increase its exports from $2.4 billion to $13 billion. But if the achievements of China and India are any testimony, it is not beyond reach.

In the grand scheme of things, policymakers have to work with one constraint. Between China and India there is a danger of Nepal’s genuine attempt to integrate economically with one country being regarded as a loss by the other. Therefore, a successful policy is the one that accelerates economic growth but, at the same time, treats both neighbours equally, wins both their support and treats their concerns sincerely.

Responsible nationalism

Nepali rulers have time and again tried to hide their weakness by blaming its neighbours—a reflexive nationalism. It was a rallying mantra in the Panchayat era and political parties exhibit this syndrome even today. Nepal is occasionally treated unfairly and it must of course protect its national interest. But the sustainable and right way to adhere to national interest is through responsible nationalism that focuses on raising the living standards of Nepalis, empowering its citizens and maintaining social cohesion.

So Nepalis want a humble government that moves forward strategically with long-term goals in mind. They do not need policies that are born out of hatred for neighbouring countries, but rather out of a fair sense of economic competition. All political parties should ask themselves how they can match their actions with people’s aspirations.

Moving forward, they should develop a set of concrete guidelines: Nepal’s institutions should be as strong as those of its neighbours, Nepal’s companies should be as competitive and innovative as theirs and Nepal must be as good as them in ease of doing business. Furthermore, a Nepali student should be able to receive as good an education as a Chinese or an Indian, Nepal’s labour market should be as skilled as theirs and the opportunity for Nepal’s poor and downtrodden should not be less than theirs.

Achieving these milestones will help Nepal turn the tide. Otherwise, very soon, Nepalis will ask this question: why is their living standard so low compared to their neighbours? And Nepali policymakers would have no one to blame but themselves. One hopes that the day of reckoning will not come when people question the value of being Nepalis if it means having far lower living standards than their neighbours’.

Acharya is an economist