Fiscal Nepal
First Business News Portal in English from Nepal
Dr. Surya Raj Acharya
When we examine the trajectory of global economic development after the Second World War, the contrast between East Asia and countries like Nepal is striking. Japan, South Korea, Malaysia, Thailand, Vietnam, China, and more recently India, advanced rapidly along the development path, while Nepal continues to lag behind. The single most important common denominator behind East Asia’s transformation has been sustained, large-scale, and strategically directed investment in infrastructure.
Historical evidence clearly shows that infrastructure investment is not merely a supporting factor of growth; it is the backbone of economic transformation.
Over the last 100 to 150 years, Europe and the United States invested roughly 1.5 to 2 percent of GDP in infrastructure. Their development was gradual, and the demand for advanced infrastructure such as airports or high-speed rail did not exist in the 19th century. In contrast, Japan invested 4 to 5 percent of GDP in infrastructure after World War II—a level Western economists at the time described as “overheated” or excessive.
China pushed this even further, investing around 8.6 percent of GDP, while India invested 4.9 percent, and Japan and South Korea around 4.6 percent. These countries faced a different challenge: they needed to compress decades of development into a short time frame. Public expectations were high, global competition was intense, and delay carried a heavy economic cost. They turned this challenge into an opportunity by aggressively building infrastructure.
Nepal faces a similar challenge today. Citizens aspire to modern services, connectivity, and economic opportunity, but the development window is narrow. That reality demands higher and smarter infrastructure investment, not hesitation.
Infrastructure investment produces impact at two levels.
First, the short-term impact. Infrastructure spending immediately creates employment, stimulates demand, and generates a strong multiplier effect. For example, an investment of Rs 1 billion in infrastructure can generate Rs 4–5 billion in overall GDP impact. This is why infrastructure has historically been the most reliable engine of economic recovery and growth.
Second, the long-term impact. Infrastructure raises productivity, enables modern services, supports competitive exports, promotes balanced regional development, and strengthens national integration. Without productivity growth, prosperity remains a political slogan rather than an economic reality.
Modern transport, energy, communication, and logistics systems make economies competitive. They reduce costs, increase exports, and help narrow trade deficits. In Nepal, we often worry about a widening trade deficit, but we rarely acknowledge that inadequate infrastructure is a structural cause. During a recent visit to Dubai, agricultural products from the Philippines, Vietnam, and India were widely available. Nepali products were absent. Our aircraft often fly half-empty because cargo systems are weak and expensive. Export ambition alone is meaningless unless logistics costs fall and domestic production becomes competitive.
Japan and South Korea invested deliberately in balanced regional development. A national highway is not just a road for vehicles; it connects people, markets, and opportunities. Infrastructure is a tool of national cohesion.
It is true that Nepal faces fiscal constraints. But a far bigger problem is our inability to spend even the budgets we already allocate. In many cases, we do build infrastructure, but the quality is poor. Sometimes quality is acceptable, yet the infrastructure remains non-operational. Airports are a prime example.
Even operational infrastructure often fails to connect with broader economic and social transformation. Roads reach villages, but they do not link production to markets or generate jobs. One telling example is when a road carries alcohol and soft drinks into villages and brings villagers out in return. This highlights a fundamental planning failure: infrastructure is being built in isolation rather than as part of a multi-sectoral economic system.
The Nagdhunga Tunnel illustrates this weakness vividly. After construction, we celebrated entering the “tunnel era.” Only later did we realize that operating the tunnel requires 120 permanent technical staff. This was not factored into planning. Such oversights reveal how shallow our project preparation processes are.
All major political parties agree that infrastructure is essential. The failure lies in implementation. Proper infrastructure development must begin with correct project identification, followed by rigorous planning and feasibility studies. A plan is not a paperwork exercise; it is clarity on what economic output an investment will generate.
Financial structuring and investment mobilization are equally critical. We often say “there is no money,” but money is not the primary constraint. Ideas, policies, and institutions create money. Post-war Germany rebuilt through the Marshall Plan, but Japan rebuilt largely through its own policy discipline and institutional strength.
Infrastructure must not only be built and operated; it must be integrated into economic and social transformation. Nepal’s core problem is not capital scarcity but weak thinking, weak policy frameworks, and weak institutions.
Our policy debates rarely analyze how Korea developed in the 1960s or how Japan transformed after the war. Malaysia under Mahathir Mohamad provides another powerful example. By imposing capital controls against IMF advice during the Asian financial crisis, Malaysia stabilized its economy. Such cases demonstrate that development requires intellectual courage, policy ownership, and long-term vision—not blind adherence to external prescriptions.
Nepal’s infrastructure challenge can be summarized as two gaps: the capital gap and the capacity gap.
On the capital side, Nepal’s domestic savings and foreign exchange reserves are relatively strong, largely due to remittances. In fact, remittance inflows have created management challenges for the central bank. The real issue is converting these flows into productive investment.
We lack effective financial and monetary instruments. Development banks in Nepal function more like retail banks. In developing economies, development banks are the primary vehicles of policy-driven financing. Japan’s Fiscal Loan and Investment Program (FILP) was at times larger than the national budget itself.
Debt monetization is another concept largely absent from Nepal’s policy discourse. Japan, one of the world’s most indebted countries, holds nearly 50 percent of its public debt within its central bank. This demonstrates that monetary instruments can be diversified and adapted to national development needs. Nepal’s public debt level is not yet alarming. The real challenge is weak macroeconomic management and the inability to channel available capital into growth-enhancing investments.
Nepal has thousands of unemployed engineers. The issue is not a lack of individual capability, but the absence of mechanisms to convert individual skills into institutional capacity.
A single engineer cannot design the foundation of a major bridge alone. That requires strong consulting firms, large construction companies, and coordinated teams. In Nepal, many contractors employ only 10 to 20 permanent engineers. In Japan, Germany, Korea, and across Europe, top structural engineers work in private consulting firms rather than government offices, because innovation, expertise, and experience accumulate there.
Even upstream industries suffer. Crusher industries supply raw materials essential for construction, yet they are socially stigmatized, weakening the entire value chain. Government agencies treat consultants as TOR-bound service providers rather than research partners. This is not real research; it is procedural compliance.
If a country has the technical capacity to build a Rs 10 billion project, then that entire Rs 10 billion should circulate domestically. A strong construction industry enables domestic capital mobilization. When technical capacity is strong, financial constraints become secondary.
When discussing infrastructure, we often say, “You should swallow according to the size of your throat.” That logic applies to households, not states. The state must have the courage to build the throat to match the bone.
In Nepal, construction entrepreneurs are often dismissed as mere “contractors.” Even legal documents rarely recognize construction as an industry. Japan and South Korea strengthened their construction industries at the very start of their development journeys. Once construction capacity matured, mobilizing domestic resources became easier.
We are quick to terminate contracts of Nepali firms, yet hesitant to challenge foreign contractors. Nepali firms face strict enforcement of domestic laws, while foreign firms often operate with greater flexibility. Strengthening domestic construction capacity would simplify planning, implementation, and overall development.
Japan built its first railway in 1872, when most Japanese had never seen a train. It borrowed from Britain at 12 percent interest, imported engineers, companies, and even railway tracks. But every British engineer was paired with five Japanese trainees—despite Japan having no universities at the time. That railway office later became the foundation of the University of Tokyo. Through technology transfer and “learning by doing,” Japan soon mastered railway construction.
South Korea’s experience is equally instructive. In 1972, it decided to build the 428-kilometer Seoul–Busan Highway. The World Bank argued the road was unnecessary and that Korean contractors lacked capacity. President Park Chung-hee rejected this view, insisting that without using domestic contractors, Korea would never learn. When the World Bank refused, Korea built the highway with its own resources—at one-third of the estimated cost and within 29 months. The project had direct presidential supervision. This single decision transformed Korean firms into global contractors.
Nepal has a tendency not only to avoid necessary policies but to add procedural complexity. Environmental protection is essential, but it must complement development, not paralyze it. Environmental policy should enable sustainable development, not prohibit development.
Sustainable development does not mean restricted development. It means simplified, balanced, and forward-looking development.
Nepal’s infrastructure bottleneck is not primarily financial. It is conceptual, institutional, and technical. Without long-term planning, infrastructure projects become wasteful exercises. Without a strong construction industry, domestic capital cannot be mobilized effectively.
Infrastructure is not just about building structures. It is a process of national capacity building. Nepal urgently needs special laws, simplified mechanisms, and strong institutions dedicated to infrastructure development. Without these reforms, we will remain trapped in debates about development rather than achieving it in practice.
Dr. Acharya is Infrastructure Expert and Registrar of the Nepal University
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