For a country as old as Nepal, the historical market economy has evolved through various phases – from the dynamic networks of Prithvi Narayan Shah’s kingdom to the centralized economic policies of the Rana regime, and finally to the liberalization and diversification efforts that led to the emergence of modern Nepal. Each phase has brought about a great interplay between political stability, strategic trade positioning, and economic policy reforms.
In the initial period, the country’s economy thrived on its natural abundance and the strategic trade positioning between India and Tibet. It maintained active trade routes with both nations from the 1200s to the 18th century. The Malla period (1200-1768 AD) saw a cultural and economic boom with Kathmandu Valley becoming a significant trade hub. The earliest mention of signing a trade treaty dates back to 1590 AD between Nepal and Tibet, that allowed Nepali traders to set up trading houses in Lhasa, and mint coins for Tibet. In 1630 AD, King Laxmi Narsingh Malla negotiated trade agreements that enhanced Nepal’s economic integration with Tibet, which included a provision for Nepalese traders to be exempt from taxes on goods carried into Tibet and for Nepal to mint coins for Tibet. Besides acting as a transit point for trade between India and Tibet, Kathmandu also established itself as a manufacturing center, with weavers and metal workers producing fast-selling exports such as copper, brass, and iron utensils.
In the 18th century, the Nepali economy was dominated by its diverse trade networks where Brahmin pandits were prominent in foreign affairs and Sanyasis were engaged in trade. In the 1790s, Morang district had emerged as a significant exporter of forest and agricultural products to India; key exports included rice, timber, oil seeds, spices, catechu, herbs and drugs, musk, wax, honey, birds, elephants, and oranges. Along with this, the district also manufactured and exported canoes, plows, cotton carpets, sack-cloth, and woolen cloths. Timber from Morang, transported via the Kankayi and other rivers, was highly prized, even more than timber from Bhagalpur in India.
The trade balance favored Morang significantly, with exports valued at Rs. 364,000 compared to imports at Rs. 71,000, resulting in a positive trade balance. The imports were limited to sugar, tobacco, indigo dye, salt, cotton goods, and metal utensils, emphasizing Morang’s strong export economy. However, economic practices were not without governmental intervention; the Nepalese government sometimes banned exports to prevent famine, reflecting the state’s active role in economic regulation.
The Shah dynasty was, however, soon swept up in a power struggle that led to the emergence of Jung Bahadur Rana in 1846 AD. He introduced the system of hereditary prime ministers that gave rise to the powerful Rana oligarchy. In the mid-1800s, Jang Bahadur Rana initiated significant reforms for land tenure and taxation, particularly in the Terai districts, including Morang, Saptari, Mahottari, Rautahat, Sarlahi, Bara, Parsa, and Chitwan. These reforms laid the groundwork for the regime’s economic policies. Land tenure reforms defined ownership and usage rights, particularly for birta (land grants) and pota birta (taxable land). The Jimidar (land managers) system was regulated to ensure accountability in tax collection and land management. Additionally, fiscal reforms included the abolition of certain levies such as darshani levies, and other levies like Amilan, Najrana, Tika, Gasti-Salami, Mejmani, Bhojani etc to simplify the tax system.
The Rana regime maintained strict control over trade and commerce, implementing detailed regulations for different regions. In Jumla, for instance, trade regulations were periodically updated to address local economic conditions and trader complaints. The thek-thiti system, as detailed in the Thek-Thiti Settlement Order of 1846, of revenue collection remained an important part of the economic administration – the elite received jagat duties (commercial taxes), nikasi and dalali (duties on hawks and horses), a share of income from musk, and fees for stamping clothes. These diversified revenue streams underscored the different economic activities in the region, which were managed through a system of contractual obligations with local officials.
Kathmandu had emerged as a manufacturing hub in the mid-1800s as it increased producing and exporting textiles, metal works, and utensils. However, political instability during this period severely impacted trade. In response to adverse conditions faced by Nepali traders in Tibet, where they were frequently harassed by Tibetan and Chinese troops, Jung Bahadur Rana declared war in 1855. The war was won by Nepal which led to the Treaty of Thapathali in 1856. This reaffirmed trade terms and exempted Nepalese traders from Tibetan customs duties, thereby facilitating smoother trade relations (Kamal Ratna Tuladhar).
The Ranas, from the inception of their rule, were confronted with the challenge of managing relations with the British colonial power in neighboring India. Although Nepal was never officially colonized, its history and economic policies were significantly shaped by its need to handle this relationship. The ruling elite, wary of indirect colonization, resisted building motorable roads that would connect Kathmandu to the expanding infrastructural network of the subcontinent. Instead, they expanded footpaths in rural areas to collect revenue and mobilize the peasant workforce.
However, the British establishment of control over Sikkim in 1860 and the development of the route into Tibet via the Chumbi Valley complicated Nepal’s economic situation. With the completion of the Calcutta-Darjeeling railway in 1881, Lhasa became more accessible from Calcutta, reducing the trade dependency on Nepal. Additionally, the rising inflow of imported goods began to capture a significant share of Nepal’s internal market. The use of imported cloth, which had long been a status symbol among the elite, gradually spread to the general population. Similarly, utensils used in agriculture and household tasks increasingly came from outside the country, as production at many of Nepal’s own copper and iron mines became uneconomical.
The Ranas maintained a centralized agrarian bureaucracy dedicated to extracting as much revenue as possible from Nepal’s resources. This system ensured that the Ranas and their associates benefitted from the agrarian economy, but it also brought social inequalities and limited broader economic development. It can also be said that isolationism was a hallmark of Rana rule; the kings insulated Nepal from the rest of the world, but kept importing commodities only for themselves. Economic development was delayed, education was provided only to a tiny minority, and industrialization was slow to begin and limited.
However, despite efforts to maintain a stable economy, the Rana regime faced severe challenges, including political instability and external events such as India’s democracy from the British that exposed the vulnerability of the Ranas. And after 104 years of ruling, the regime finally met its end.
The fall of the Rana regime in 1951 marked the beginning of a new era in Nepal’s economic history. The transition to a more democratic political system brought significant economic reforms and development initiatives. Politically, Nepal experienced multi-party democracy for the first time, while economically, the country began to move towards planned socio-economic development. The first annual budget was announced in 1953, and by 1956, the government launched the first development plan. This period represented a critical turning point as Nepal sought to create a socio-economic environment that would improve the well-being of its people and allow them to lead happier and better lives.
Agrarian reform was a major focus of early economic policy. The first Land Reform Commission was set up in 1952, but its recommendations were initially unimplemented. However, in 1955, a Royal Proclamation initiated agrarian reforms, and by 1957, the Land Reform Act was enacted. This Act aimed to alleviate the burdens on peasant cultivators by capping rents, setting interest ceilings, abolishing forced labor, and protecting tenants from unjust eviction. Despite these ambitious reforms, implementation was hampered due to inadequate land records, data on crop production, and administrative challenges. The Birta Abolition Act of 1959 further aimed to reform land ownership, transferring proprietary rights over Birta land to the government and compensating former Birta holders with interest-bearing bonds. This Act was intended to convert all Birta land into Raikar land, though issues with rent collection and tenant relationships persisted.
The lack of infrastructure, such as transport and power facilities, as well as limited markets, capital, and technical and managerial skills obstructed industrial development. Although many joint stock companies were opened between 1936 and 1950, only few survived. The rapid establishment of manufacturing companies in the 1940s and 1950s was primarily driven by wartime scarcity and temporary government incentives. However, many of these companies struggled to operate in the post-war economy (IMF).
There were multiple revisions of economic reform, starting in the mid-1980s. The first phase focused on stabilization measures, but had limited success. The 1980s brought a notable improvement in agricultural performance, with growth rates rising to about 4.5%. This turnaround was driven by various factors, including improved agricultural practices, increased use of irrigation, and government support for rural development. The agricultural sector’s success was crucial, as it still accounted for a significant portion of Nepal’s GDP.
The second phase of reform in the early 1990s, under a democratic government, saw more comprehensive reforms, including trade liberalization, tariff reduction, and fiscal policy improvements. The third phase in the late 1990s introduced agricultural liberalization and local governance reforms.
By the late 20th century, Nepal’s economy began to diversify. The share of agriculture in GDP declined from over 70% in the mid-1970s to about 40% by 2000. Meanwhile, manufacturing and other non-agricultural sectors, such as construction, trade, transportation, finance, and real estate, saw significant growth. This diversification was driven by policy reforms aimed at liberalizing the economy and encouraging private sector participation.
Fiscal reforms in the 1990s aimed to broaden the tax base and improve revenue administration. However, despite these efforts, government revenue remained insufficient to meet development expenditure needs, leading to increased reliance on external debt. By 2003/04, government revenue was only about 11% of GDP, while expenditure was around 17%.
The fourth phase around 2000 focused on governance and financial sector reforms. These reforms led to tangible improvements, such as increased export growth, higher private sector investment, and a more open economy. Exporters received various incentives, and foreign direct investment was encouraged. The trade-GDP ratio increased significantly, and the current account deficit improved.
Nepal’s trade regime experienced considerable diversification over the decades. While India remained a major trading partner, accounting for about half of Nepal’s exports and imports, trade with other countries also increased. The share of manufactured exports grew significantly, reflecting the success of industrial policy reforms. However, structural weaknesses persisted, and the export sector remained vulnerable to external shocks.
The evolution of Nepal’s market economy is a testament to the dynamic relationship of political stability, strategic trade positioning, and economic policy reforms over centuries. Nepal has progressed significantly in diversifying its economy. Accounts and recollections of such extensive economic history helps in shaping future strategies and policies, and creates a foundation that allows the country to remain resilient.
References
Mahesh Chandra Regmi’s Series of Documentation of Historical Nepal
The Regmi Research Series Collection
The Economy of Nepal, IMF, 1963
Caravan to Lhasa, 2011
Book by Kamal Ratna Tuladhar
The Economic Development of Nepal: A Long-term Perspective, 2007
By S.R. Osmai and B.B. Bajracharya