Lessons from Korea's Development Experience for Nepal

-Dr. Prakash Kumar Shrestha*

_________________________________________________________________________________

Abstract
This paper analyzes the development experience of Korea1 and Nepal from multidimensional
perspectives, for which the policies undertaken by Korea for economic development have
been reviewed and compared with the policies adopted by Nepal. This paper also compares
other potential determinants of development in both countries, such as history, geography,
culture and initial conditions. Finally, some lessons are drawn for Nepal which has
remained underdeveloped so far, although there is no unique path for development and
circumstances have changed. Some approaches taken by Korea, such as emphasis on
education, physical infrastructure, industrialization and land reform, are highly relevant for
Nepal. Moreover, there should be stable politics, commitment for development and a timely
implementation of policies and programs in Nepal.
JEL : O2; O57
___________________________________________________________________________

1. Introduction
Economic development is a complicated and multi-dimensional process, involving various
sectors, such as economic, political, social, cultural, technological and geographical. It,
therefore, involves the right mixture of all of the necessary ingredients and must overcome
many obstacles (Chung, 2007, p.3). Korea succeeded in overcoming obstacles for
development and achieved an economic miracle within a short period of time. There was not
a big difference between Korea and Nepal in terms of economic development in 1950.
However, a gap in development between these two countries widened considerably
thereafter. Korea has now become an advanced country - a member of OECD, while Nepal is
still one of the Least Developed Countries (LDC) in the world. Between 1961 and 1989,
Korea succeeded in creating the "virtuous circle" of economic development, while Nepal
remained trapped in the "vicious circle" of underdevelopment, which still continues. Such a
contrasting development scenario is an interesting case study to understand the economic
development process and to draw lessons for Nepal to design a successful development path.
What made Korea to succeed in transforming its economy has been the matter of discussion
for academicians and policy makers worldwide. Korea was one of the poorest countries in the
world with an agrarian and stagnant economy in 1948 (Sakong and Koh, 2010). By 1990,
Korea had transformed itself into an industrialized and dynamic economy. On the other hand,
despite being independent from the feudal autocratic Rana Regime at the same time when
Korea became an independent, Nepal is still in an underdeveloped stage with low per capita
*

Director, Research Department, Nepal Rastra Bank. Views expressed here are personal; do not belong to the
affiliated institution.
1

Korea refers to the Republic of Korea or South Korea.

1

income and widespread poverty2. This shows that Nepal's development efforts have failed,
although Nepal had some similarities in policy approaches with Korea in the past, such as
import substitution, financial repression, government intervention in economic activities,
planning approach, and autocratic political regime until the latter half of 1980s.
In this context, this paper analyzes the path undertaken by both Korea and Nepal for
economic development since 1960. How Korea succeeded in transforming its economy
especially during 1961-89 and why Nepal failed to do until now is the matter of main concern
for this paper. The paper is structured as follow. Section two compares the level of
development in Korea and Nepal briefly, while section three presents possible non-economic
determinants of economic development and starting situation in the 1950s and 1960s.
Policies and programs adopted by Korea for economic development are assessed and
compared with Nepal in section four, and relevant lessons for Nepal have been drawn in the
fifth section. Finally, section six concludes the discussion.

2. Economic Development in Korea and Nepal

Some important development indicators are analyzed here to portray the trend and level of
economic development in Korea and Nepal.
2.1 Per Capita Income
Per capita income is one of the highly used variables to gauge the level of economic
development. In Korea per capita income (at constant 2005 US$) grew by 18 times from
1609 dollars in 1960 to 29618 dollars in 2011, while in the same period, per capita income in
Nepal increased marginally from 576 US dollars to 1189.4 US dollars 3 (Figure 1). The per
capita income of Korea, which was just 2.8 times higher than that of Nepal in 1960, increased
to almost 25 times higher than Nepal's per capita income in 2011. This shows the stagnation
of the Nepalese economy relative to its population growth.
Korean economy grew by 7 8 percent compared to mere 2 -3 percent growth of Nepalese
economy during the 1960s and 1970s. Although Nepalese economy accelerated slightly in the
1980s and 1990s, the pace of growth was far below the rate of growth observed in Korea. In
this way, with a higher economic growth rate for three decades, Korea succeeded in
achieving economic transformation.

With the beginning of remittance inflows in recent years, the poverty level has been gradually
declining in Nepal. There are 23.8 percent of people under the absolute poverty line in 2013 (MoF,
2013).
3

Penn World Table, version 8.0

Figure 1: Per Capita Real GDP (at constant 2005 US$)

30000
29000
28000
27000
26000
25000
24000
23000
22000
21000
20000
19000
18000
17000
16000
15000
14000
13000
12000
11000
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0

Korea

2010

2007

2004

2001

1998

1995

1992

1989

1986

1983

1980

1977

1974

1971

1968

1965

1962

1959

1956

1953

Nepal

Source: http://www.rug.nl/research/ggdc/data/penn-world-table

2.2 Human Development Index

The Human Development Index (HDI) consists of three dimensions of economic
development per capita income, health and education. Figure 2 shows the progress in
human development both in Korea and Nepal. While the HDI in Korea has exceeded 0.9,
Nepal's HDI is still below 0.5. This shows a huge gap in human development between Korea
and Nepal. Such a gap implies that Nepal is not only behind in per capita income, but also in
health and education. Nepal has not yet reached the level of human development which
Korea had achieved by 1980. Such a situation reflects the laggardness of Nepal in achieving
economic development in the true sense.

Figure 2: Human Development Index in Korea and Nepal

1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

Korea
Nepal

1980

1990

2000

2005

2007

2010

2011

2012

3. Disentangling the Reasons behind Development Differences

3.1

Brief History

To understand the development difference between Korea and Nepal 4, it is imperative to look
at their history. While Nepal has always been an independent nation, Korea was annexed by
Japan in 1910. Along with the independence from Japan in 1945, Korea was divided into
Soviet and the U.S. controlled regions. This led to the formation of North and South Korea.
In 1950, the Korean War between the two regions killed 1. 3 million people and caused heavy
physical destruction (Chung, 2007, p.12). On the other hand, for more than a century, Nepal
was ruled by the autocratic feudal family-based Rana dynasty. In 1846, the Rana family
gained power and established the hereditary prime ministerial system, and reduced the King
to a figurehead, which lasted until 19505 (Seddon, 1988). The Rana regime kept Nepal
completely in a state of autarky without any economic development.
After the liberation from Japan, the first independent Korean government was formed in 1948
(Koh, 2010)6. In Nepal, on the other hand, the armed struggle led by the Nepali congress
party with the support of King against the Rana regime succeeded in restoring the monarchy
and launched the era of quasi-constitutional monarchy in 1951. The Rana regime ended with
the independence of India from the British rule because of lacking external support and the
desire for freedom on part of the Nepalese people (Panday, 2009).
Political stability and commitment from the leadership seems to be vital for accelerating
economic development in Korea. Rhee Syngman, the first president of Korea, started
rebuilding the economy with a series of reconstruction plans and ruled for about 12 years
(Appendix 1). After a brief period of the parliamentary system (1960-61), Park Chung-hee
4

Nepal was founded in the 18th century and it has been an independent country in its current
geographical shape since 1768 (Raiz and Basu, 2007, p2).
5
In 1846, Jung Bahadur, the founder of Rana Regime, seized executive power from the King for
himself and his brothers through massacre in the palace.
6
There was an American military government in charge of Korea between 1945 and 1948.
4

came into power in 1961 through a military coup, but later he was elected as President in
1963 and ruled until 1979 by winning four elections. He adopted an export-led growth
strategy by building a powerful industrial base in Korea. After his assignation in 1979, Chun
Doo- hwan came to the power through military coup in 1980. Finally, in 1987, democracy
was restored in Korea and Roh Tae- woo won the election and became President in 1988.
Hence, Korea had overall political stability during its development process, although there
were various kinds of protests and political turning points.
The political situation in Nepal has been different than Korea. After the end of the Rana
regime, the power shifted to the King in 1951. Attempts to have a kind of parliamentary
system with the King as a head of state during 1951-59 finally failed. Although the first
democratic election was held in 1959 and the Nepali Congress party won the election with
the two-thirds majority, the King dismissed the elected government within a year, which led
to the system of absolute monarchy. The King suspended the democratic constitution,
banned political parties and declared the parliamentary system as a failure, and finally
promulgated a new constitution in 1962, which established the party-less Panchayat system
(Panday, 2009).
The Panchayat system, which lasted for more than 30 years until 1990, did not have any
space for dissent and opposition. This system was obviously autocratic and aristocratic in
nature almost similar to the military regime in Korea. However, there was a major difference
that the King did not need to be elected and did not have any accountability towards the
people. Because the power transferred through political dynastic, it was not necessary for the
King to have the adequate leadership skills to run and develop the country. Hence, despite
the political stability during the Panchayat regime, Nepal could not embark on its
development process, rather it progressed at a snails pace due to the lack of commitment and
a weak implementation of policies and programs.
A form of parliamentary democracy, where the King as the head of state and the prime
minister as the head of the government, was introduced in 1991 after popular protests by then
banned political parties. However, a frequent change of government has become a normal
phenomenon (Appendix 1). In fact, Nepal has witnessed an erosion of state capacity and the
failure of political parties to meet the people's expectation (Riaz and Basu, 2007). Amidst
political instability, Maoist rebels started a decade-long campaign against the monarchy in
1996. Several analysis suggests that the widespread poverty and unemployment, sluggish
economic performance, inequality, and social and gender discrimination were some of the
key underlying causes for this uprising. In February 2005, then King Gyanendra, by
dismissing the coalition government and suspending democracy and civil liberties, assumed
absolute political power by imitating the path taken by his father, King Mahendra in 1960.
The power struggle among the King, mainstream political parties, and the Maoist for power
damaged the Nepalese economy for a decade until a popular uprising against the King in
2006. The King finally agreed to hand over the power to the people and the election for
constituent assembly was held, which later declared Nepal as a Republic in 2008. This
abolished the 250-year old monarchical system. Currently, Nepal is a young republic similar
to Korea in 1945. However, the political transition is still ongoing with unsettled political
agendas among different political parties.

3.2 Geography
Geography also matters for economic development. In terms of the land mass, Nepal is
bigger than Korea. As a result, average population density is low in Nepal compared to
Korea, but more than 75 percent of land is covered by mountains and hills in Nepal (Figure
3). Most of this land mass is unsuitable for living or agriculture, and the topography of the
country makes construction of physical infrastructure extremely difficult and costly.
Uncultivable snow covered mountain regions occupy 35.2 percent of total land surface and
barren hills constitute 41.7 percent of land; only 21 percent of land is cultivable (Riaz and
Basu, 2007). It has 90 peaks over 7000 meters including Mount Everest (8848 meter)7,
whereas the highest mountain peak in Korea is Hallasan with 1950 meter height and
approximately 30 percent of the area of Korea consists of lowlands8.
While Korea is mostly surrounded by sea, Nepal is a landlocked country situated between
India and China. Nepal has to rely on India for access to any sea port for international trade,
which is relatively costly9. Hence, Nepal may not able to compete in exporting merchandise
goods as Korea has been doing since 1960. However, Nepal is rich in fresh water resources
with a technically feasible hydropower potential of 45610 MW(WECS, 2011). In addition,
Nepals geographical diversity presents great prospect for tourism and the production of
herbal products.
Figure 3: Map of Korea and Nepal

Source: http://www.worldatlas.com/webimage/countrys/asia/np.htm

http://en.wikipedia.org/wiki/Geography_of_Nepal
http://en.wikipedia.org/wiki/Geography_of_South_Korea
9
This dependence on India for trade and transit has virtually served to reinforce India's monopoly
position in Nepal. India threatened Nepal by holding up fuel supplies in 1971 and 1988 (Luitel, 2009).
8

3.3 Culture and Society

Nepal is a land of diversity where the society is characterized by feudal or semi-feudal and
patriarch and hierarchical order (Panday 2009). Nepal had the monarchical system until 2008
and the people used to consider the King as a paternal figure with a divine right, which had
created some sense of dependency. More importantly, based on the religious dominance of
the Hindu faith, the caste system has been very much rooted in the Nepalese society (Seddon,
1988). According to the recent census 2011, there are nearly 125 caste /ethnic groups (CBS,
2012) - some group of people are even considered "untouchable", which are the most
deprived section of people in the society. However, these people have different occupational
skills and often work as blacksmiths, tailors and cobblers.
The Nepalese culture is highly shaped by the Hindu Religion10, which preaches that people
should be satisfied whatever they have. One dark side of the Nepalese culture is that women
are normally treated unequally and socially oppressed. For a long time, early age marriage
was rampant and continues to exist in some form even today. Girls were deprived of the
access to education since people did not think that sending girls was desirable and beneficial
until recently. Such practices still exist in rural areas, although this kind of attitudes have
been changing and the participation of women in formal work has been increasing in recent
years, at least in urban areas. More importantly, the Nepalese society, even government
activities, has been marred by "Let's do tomorrow" culture almost no time pressure. For
example, being late in meeting is considered as a sign of important. This may be a reason
that nothing happens on given time in Nepal.
The Korean culture is, on the other hand, shaped by Confucianism which is "based on the
belief that people need to work for the good of the mass and for the good of the nation Personal needs, ambitions, and concerns are much less important (Kim and Jaffe, 2010,
p.179). More importantly, Koreans pay close attention to completing tasks on time -an
army- style culture, which means punctuality is a sign of respect (Kim and Jaffe, 2010,
p.182). Women were given equal rights and opportunities; as a result they made up a large
part of the labor force in the 1960s when Korea launched its economic development (Koh,
et.al, 2010, p.299). They continue to play an important role in the subsequent periods as well.
3.4 Initial Conditions
Foundations seem to be necessary for any economy to take off. In 1951, Nepal was a hermit
kingdom, with complete dependence on subsistence agriculture11 with no sign of
development. It had become an independent nation coming out of a century of the Rana
regime. Only Kathmandu valley had electricity back then which also was very dim (Skerry et.
al. 1991:20, quoted in Panday, 2009). The transportation network consisted of about 100 km
of railway track, about 50 km of ropeways, and no more than 400 Km fair-weather roads
(Shah, 1981). The total electricity generating capacity of the country was 7.03 MW which
was enough to serve only one percent of the population in 1961 (NPC, 1992). On the social
side, the literacy rate is believed to have been no more than two percent, with less than one
10

Hinduism is followed by 81.3 percent of the population. Other religion like Buddhism is followed
by 9.0 percent of population, Islam by 4.4 percent, Christianity by 1.4 percent (Census 2011)
11
Non-agricultural sector contributed probably less than 10 percent of community output. Modern
industry meant a few small and medium sized firms employing less than 1 percent of the labor force
(Shah, 1981).
7

percent of school age children going to schools and there were only 321 primary schools in
1951 (Riaz and Basu, 2007). The Rana rulers were very hostile towards mass education
which they feared to generate popular discontent against them (Riaz and Basu, 2007, p.105).
Likewise, average life expectancy at birth was no more than 35 years (Shah, 1981).
On the other hand, Korea had some strong foundation built during Japanese colonial time
although the Korean War damaged most of them. In Korea, literacy rate was 22 percent in
1945 (Koh, et.al. 2010, p.234) which was significantly higher than the literacy rate of two
percent in Nepal. The eradication of illiteracy made great strides resulting in dramatic fall in
illiteracy rate from 78.2 percent in 1948 to 4.1 percent in 1958 (Koh, et. al., 2010, p.238).
The elementary education expanded rapidly in the late 1950s and achieved the universal
education in the early 1960s before embarking on industrialization in Korea (Koh, et. al,
2010, p.242). Nepal is still struggling to make its citizen literate even today.
Chung (2007) stated that the fundamental transformation of the Korean economy began
during the Japanese colonial time before 1945. During the colonial time, the real value added
in manufacturing grew by more than 10 percent per year on average and manufactured goods
accounted for more than 40 percent of exports (Chung, 2007). Japanese colonialism, indeed,
left a rich legacy of capital, including human capital (Chung, 2007, p.8). However, the
Korean War destroyed 46.9 percent of the railroads, 1,656 roads (a total of 500 kilometers),
and 1,453 bridges (49 kilometers), nearly 80 percent of power plant12 and great human
casualties (Chung, 2007, pp.9-12). It seems that such a terrible shock of war had created a
sense of national unity and feelings of revenge through economic recovery as soon as
possible a do or die situation. On the other hand, Nepal did not face such a shock and the
Nepalese people have remained complacent on whatever they had because of being isolated
from the world and being largely illiterate in the past.

4. Comparing Korea and Nepal's Development Efforts

This section presents major policies undertaken for economic development since 1961 in
Korea and compares that with Nepal. It will give us the comparative analysis of similarities
and difference of policies taken in both countries.
4.2 Major Economic Policies
Heavy Investment
Rapid economic growth and structural transformation in Korea was the result of heavy
investment (Table 2). Investment reached its peak in 1991 at 40 percent of GDP (Kim and
Koh, 2010, p.92). In Nepal investment has always remained very low (Table 2). The Korean
government made considerable efforts to alleviate shortages in economic infrastructure
through investment. Korea generated enough electric power relative to demand and
completed major expressways by the mid-1960s (Koh, 2010). However, due to the lack of
adequate investment, the Nepalese economy has been facing acute shortage of physical and
social infrastructure even today. Only 67 percent of people have access to electricity (CBS,

12

Power production plummeted to a miserable figure of 11,000 kilowatt-hours in the whole country,
which was one-tenth of the power consumption level in 1945 (Chung, 2007, p.9).
8

2012) and the people have been facing power cut-off as high as 12 hours per day in dry
seasons.
Table 2: Investment, Manufacturing and Exports of goods and services as % of GDP in
Korea and Nepal

1960s
1970s
1980s
1990s
2000s

Investment/ GDP
Korea
Nepal
18.9
5.4
28.5
11.2
30.4
19.9
35.4
22.7
29.5
23.0

Manufacturing
Export /GDP
Value/GDP
Korea
Nepal
Korea
Nepal
7.8
6.8
15.6
3.6
24.6
8.2
21.6
4.1
33.9
11.4
27.5
5.2
30.8
19.5
27.1
8.8
40.7
16.2
27.2
8.3

Source: World Bank's World Development Indicator 2014

Directed Industrialization
Another important set of policies adopted in Korea was the heavy focus on industrialization
which helped it achieve a phenomenal economic growth. Industrialization was the central
theme of the Five-Year Economic Plans, which modernized the industrial sector and enhance
its international competitiveness by rapidly expanding the key industries - cement, fertilizer,
industrial machinery, oil refinery and others. (Koh, 2010, p.20). The second Plan (1967-1971)
placed emphasis on Heavy Chemical Industries (HCIs), including steel, machinery and
petrochemical industries. Different acts for each type of industries were enacted13. In fact,
Korea successfully made transition from primary industries in the 1950s to labor-intensive
industries in the 1960s, to capital intensive industries in the 1970s, and to knowledge-based
industries in recent years (Kim and Koh, 2010). Hence, the share of manufacturing in gross
value-added rose from 15.6 percent in the 1960s to 27.5 percent in the 1980s (Table 2).
Government provided various supports for industrialization such as long-term credits and tax
incentives to selected industries; established and expanded vocational schools and training
centers to supply skilled manpower; and created government-funded research institutions to
carry out R&D activities as a public good14 (Koh, 2010, pp.21-22).
In Nepal, some industries were established as public enterprises such as sugar, cigarette,
textile, leather, and brick, and about a dozen industrial estates were established for promoting
industrialization during the Panchayat era. There was a protectionist industrial investment
regime which was regulated by means of a rigorous licensing system. The Industrial Policy of
1957 was inward looking and focused on import substitution and self-reliance, and only the
large business houses and people with connection to the royal family were awarded
13

For example, the Steel Industry Promotion Act (1969) the Machinery Industry Promotion Act
(1967), the Shipbuilding Industry Promotion Act (1967), the Textile Industry Modernization Act
(1967),the Electronics Industry Promotion Act (1969), the Petrochemical Industry Promotion Act
(1970), the Nonferrous Metal Producing Business Act (1971)all were introduced to provide
financial and tax incentives to these industries (Koh, 2010, p.20).
14
The public sector accounted for 50-70 percent of total R&D spending with the mission to import
advanced foreign technologies, modify them to suit local needs (Koh, 2010, pp.21-22).
9

licenses15. There were bureaucratic hassles and the private sector was not well-developed to
lead the industrialization process. More importantly, there was no R&D budget to identify
relatively important and viable industries for Nepal. This situation still exists in Nepal.
The Nepal Industrial Development Corporation (NIDC) was established in 1959 to provide
financial assistance and technical help for establishing industries16. For industrialization,
priority was given to local material processing industries, import substitution industries,
export-oriented industries and basic industries for fertilizer and agricultural tools (Gurung,
1989, p.9). However, industrial development remained lackadaisical and haphazard despite
providing tax and interest rate facilities. A number of factors such as the lack of proper
implementing mechanism, procedural constraints, administrative delays and the lack of
entrepreneurial skills contributed to the dismal performance of the industrial sector during the
Panchayat era. Industrial performance continues to be weak.
Export Promotion
Industrialization and export promotion were interlinked in Korea. Exports began to grow
rapidly following the two rounds of devaluation in 1960 (Koh, 2010, p.17). Inspired by the
success, the government started more serious efforts towards promote exports in 1964-1965.
Several administrative measures for export promotion were adopted by setting a target for
export each year, i.e. export targeting. Monthly Export Promotion Meetings, chaired by
President, were held including business representatives to monitor export performance and to
identify problems and solutions. In addition, the Korea Traders association and the Korea
Trade Promotion Agency (KOTRA) were established which took charge of building overseas
networks, helped the marketing activities of domestic firms, and collected market information
(Koh, 2010, p.19).
Moreover, for export promotion, the government implemented exchange rate reform,
provided export subsidies, as well as education and training to support export industries (Kim
and Koh, 2010). In 1964, the Korean government adopted the Comprehensive Export
Promotion Program, which placed export promotion in a comprehensive and consistent
framework (Sakong and Koh, 2010, p.132). Credit incentives and the export insurance system
were also introduced. Further, responding to the need for medium- to long-term credit for
exports and imports, the Export-Import Bank of Korea was established in 1976 (Sakong and
Koh, 2010, p.132).
In contrast, the government of Nepal followed a closed and protectionist trade regime in
1956, which regulated industrial investment through a rigorous licensing system. Domestic
industries were protected from foreign competition with the help of high tariffs and
quantitative restrictions. Imports of intermediate goods were also subject to import licensing.
Restrictions in the use of foreign exchange were put in place (Sharma, 2001). Some efforts
were made for export promotion such as Exporters Exchange Entitlement Scheme,
popularly known as the Bonus System in 1961 (Shrestha, 1978). Under this system, those
earning convertible foreign currencies through the export of goods were issued a bonus
15

http://samriddhi.org/userfiles/research%20and%20publication/discussion%20paper/economic%20mo

del-english.pdf
16

The NIDC itself became defunct by the end of Panchayat with huge non-performing loans.
10

certificate and only those having a bonus certificate were eligible for further imports
(Adhikari, 2005, p.315). Because of the problem of over invoicing of exports, the bonus
system was replaced by the dual exchange rate system in 1978 (Adhikari, 2005).
Beginning in 1982, however, Nepal started to move towards an open and liberal trade regime.
Export incentives were provided to a number of different industries and several sectors were
gradually opened for foreign investment. Further, the import license auction system was
introduced in July 1986, as a first move towards the direction of trade liberalization
(Adhikari, 2005). A more liberal trade policy was finally introduced in 1992 with the
objective of promoting exports. Subsequently, the open general license (OGL) system was
implemented in 1993, under which all goods except some related to health and security could
be imported through letter of credit. However, despite trade liberalization and export-oriented
trade policy, the export performance of Nepalese economy has been very dismal because of
the lack of competitive goods to sell in the international markets. Instead, trade liberalization
has further hurt the industrial sector because of the influx of cheap imported goods. Hence,
the exports-GDP ratio has remained very low in Nepal compared to Korea (Table 2).
Exchange Rate Policy
Both Korea and Nepal used the exchange rate policy for export promotion. However, in early
days, Nepal struggled to increase the circulation of Nepalese currency (NC) by replacing the
Indian currency (IC). On the other hand, from the very beginning, Korea used the exchange
rate as a major policy instrument for export promotion. But Nepal focused on exchange rate
stability with India on account of a number of factors like geographical proximity, major
trading partner, open border, informal cross-border trade and close socio-culture tie.
The Korean government maintained a complicated multiple exchange rate system and tight
control on the use of foreign exchanges to promote exports and control imports. The
government devalued the won several times to increase its export competitiveness and
different level of rates were set depending on several factors, such as the type of investment,
the degree of competition for particular types of imports, and the political influence of the
borrower (Chung, 2007). In June 1961, the government adopted a unified exchange rate
system which was, however, abandoned two years later, in 1963, because of the balance of
payments deficit and reverted to the multiple exchange rate system (Chung, 2007). Finally,
the Korean government introduced the managed floating exchange rate regime in 1990
(Sakong and Koh, 2010).
Almost similar to Korea, Nepals foreign exchange system was also strictly controlled until
the beginning of the 1990s and the dual exchange rate system was introduced with a view to
providing effective incentive to Nepalese exporters in 1978. Two types of exchange rates for
the US dollar were fixed basic and special; the latter rate was higher than the former. The
basic rate was used for general transactions, while the second rate was set for all the
convertible foreign exchange earnings through exports (Adhikari, 2005). Although Nepals
export to third countries (other than India) recorded some improvement, some adverse effects
emerged. For instance, import trade shifted towards India and instances of over invoicing of
exports and under invoicing of imports were recorded. All this led to the end of the dual
exchange rate system in 1981 (Adhikari, 2005).

11

With regards to the exchange rate with Indian currency, Nepal has been maintaining a pegged
exchange rate system since 1960, with the commitment of free and unlimited convertibility of
the Indian rupee (Adhikari, 2005). Nepal revalued its pegged exchange rate with the Indian
currency in 1966 to establish confidence in the Nepalese currency17. However, after one and a
half years, Nepal devalued its currency by 24.8 percent against Indian currency in 1967 to
maintain competitiveness in the world market. After that, Nepal made three devaluations with
the Indian currency until 1985, when a currency basket system was introduced. In practice,
however, the basket system did not work since the government kept the exchange rate of
Indian currency unchanged on a daily basis, but did so discretionally three times over the
period until 1992. In 1991, the Nepali Rupee was revalued against Indian currency by 1.79
percent and was devalued against the US dollar by 20.9 percent. After abolishing the basket
system, the NRB reintroduced the pegged exchange rate with the Indian currency in 1992.
Financial Repression and Directed Credit
Throughout the industrialization process, Korea used the policy of directed lending,
maintaining a high degree of financial repression. Nepal had also exercised financial
repression and followed directed lending until 1990. Even after adoption of financial
liberalization policy, Nepal followed the priority sector lending until 2007/08 and has been
continuing the policy of deprived sector lending. Until 1989, Nepal Rastra Bank used to set
the interest rates on deposits and lending for commercial banks, as in Korea. There were just
two commercial banks and two development banks. The latter two being the Nepal Industrial
Development Corporation (NIDC) and Agriculture Development Bank (ADB) both owned
by the government in Nepal. The private sector was not allowed to open banks and financial
institutions until the mid-1980s.
More importantly, the Korean government established various specialized financial
institutions such as the Korea Development Bank (1954), a solely government-owned bank to
provide long-term credits to key industries (Sakong and Koh, 2010). Other specialized
financial institutions include the Industrial Bank of Korea (1961), the National Agricultural
Cooperative Federation (1962), the National Federation of Fisheries Cooperatives (1962),
Korea Exchange Bank (1967), Korea Development Financing Cooperation (1967), Korea
Trust Bank (1968), Housing and Commercial Bank (1969), and the Export-Import Bank of
Korea (1976) (Sakong and Koh, 2010). In contrast, both existing specialized institutions in
Nepal NIDC and ADB - have been converted into conventional deposit taking institutions.
As a result, Nepal lacks specialized financial institutions to provide sector- specific credit to
agriculture, industries and infrastructure.
Restrictive Labor Market Policies
Korea followed a set of restrictive labor market policies during the industrialization phase.
After the liberation, many labor unions were organized doing the political lines and fought
with each other in Korea which compelled the military government to suspend the labor law
and dissolve the labor unions in 1961(Koh, 2010). Koh (2010) mentions that the Korean
government further prohibited multiple unions within a firm and banned labor unions from
17

Because of the widespread use of Indian currency in Nepal, Nepal introduced the Circulation of the
Nepalese Currency Act, 1957 and the Control of the Foreign Exchange Transaction Act, 1960, the
Foreign Exchange Regulation Act 1960, all with the aim to increase the circulation of the Nepalese
currency (Adhikari, 2005).
12

political involvement, but provided them with statutory benefits and protection of workers,
such as paid leave, severance payments, and limited work hours. Oppression of the labor
movement continued in the 1970s and in the 1980s, following the declaration of the state of
emergency by promulgating the act on Special Measures on National Security and amending
the Constitution (Koh, 2010, p.38).
In Nepal, during the Panchayat era, trade unions were completely banned. After the
restoration of multiparty system in 1990, the government enacted the new Labor Act 1991
and the Trade Union Act 1991, which were quite liberal and allowed forming the trade
unions. As a result, there are multiple trade unions in industrial establishments associated
with different political parties. Such unions exist even in civil service and public enterprises.
Trade union militancy has been increasing in Nepal in recent years, resulting in the
deteriorating industrial relations. It seems that Nepal now has similar trade unions' activities
that Korea observed in the 1950s and 1960s.
Economic Liberalization
Along with the introduction of neo-liberal policy worldwide in the 1970s and 1980s, both
Korea and Nepal started liberalizing their economy in the beginning of the 1980s18. But the
difference is that at the time of liberalization, Korea was already an industrial economy with a
sound industrial base, and with the capacity to compete in the world market. In contrast,
Nepal liberalized the economy without making its economy strong enough to take part in
global competition. As a result, the Nepalese economy, although some sectors exhibited
improvement after liberalization, has been stagnant as a whole with deteriorating industrial
sector and weakened export performance. Economic growth has not improved in the postliberalization period, resulting in widespread unemployment. However, the poverty level has
been declining as a result of foreign employment and the inflow of remittances.
On liberalization, Korea, by announcing the Comprehensive Economic Stabilization Program
1979, pursued contractionary policies and privatized banks (Sakong and Koh, 2010). The
government reduced export subsidies and tariff rates, lowered HCI investments and
liberalized the interest rate but maintained protection in agriculture (Sakong and Koh, 2010).
In Nepal, economic liberalization includes financial and trade liberalization, deregulation of
the interest rate (in 1989), removal of the licensing system for opening industries and the
abolition of subsidies provided to agriculture. However, the nascent economic reforms were
soon blunted by the re-emergence of inter-party and intra-party feuds, and a decade long
armed conflict. More importantly, the abolition of agricultural subsidies hurt poor farmers in
Nepal.
4.2 Agricultural Land Reform
Korea successfully implemented land reform to pave the way for industrialization. At the
time of liberation in 1945, the rural society in Korea comprised of a small number of farmers
who owned their own land and a large number of tenant farmers who had the slave-like
status.19
The Korean government enacted the Farmland Reform Act of 1949, on the
18
19

Nepal implemented IMF's structural adjustment programme in 1987.

https://www.kdevelopedia.org/experience/view/73.do#.UxX26_mSw1I

13

principle of compensated forfeiture and non-free distribution, whereby the government

bought farmland from landlords at forced prices and sold it to the farmers below the market
rates (Koh, 2010, p.11). The Farmland Reform Act also banned the farmland ownership by
non-farmers, imposed land ceiling per farmer, and prohibited tenant farming (ibid). The
agricultural land reform in Korea accelerated productivity growth in agriculture and raised
farmers' income which they spent on educating their children. On the other side, landlords
used the money received from selling their farms to invest in industrial enterprises - an
important source of capital for the initial stage of manufacturing (Kim and Koh, 2010, p.102).
Moreover, machinery and new farming methods were also introduced to improve agricultural
productivity, with the motive of achieving self-sufficiency in grain production. All these
changes led to a huge improvement in agricultural productivity, which helped Korea achieve
self-sufficiency in food production at least in the case of rice (Kim and Koh, 2010, p.106).
Realizing the importance of land reform considering unequal distribution of land and the
problem of tenants, Nepal also carried out the land reform program, but this reform didnt
remain successful. Although the Land Reform Act in 1957 and 1959 sought to improve the
condition of tenants, many provisions were not enforced due to the absence of effective
implementation mechanism, institutional hindrances and the lack of intention (Riaz and Basu,
2007). Another land reform act was passed in 1964 by the Panchayat regime, which imposed
ownership ceilings and tenancy rights. Because of several loopholes, the redistributive aim
of act also remained largely unfulfilled (Riaz and Basu, 2007). Hence, land reform in Nepal
could be termed cosmetic.

4.3 Development Planning

The development-state view claims that prevalent market failures in the early years
necessitated government intervention to correct them. The East Asian countries, including
Korea, purposefully distorted relative prices -getting the prices wrong" (Amsden, 1989) and
boosted investment in particular sectors. More important than getting the prices right, a
developmental state must get policy priorities right (UNDP, 2013, p.68). From the history of
economic development, it seems that government should play the role of developmental state
to navigate the development process in the country (Reinert, 2007). Koh (2010) argued that
there was a heavy government intervention in Korea for export promotion, industrialization,
and financial repression in line with the role of developmental state. However, at the same
time, he viewed that there was a relatively stable macroeconomic environment, wellestablished private property rights, and large public spending on education and infrastructure
investment to facilitate markets to work. Some degree of government intervention continued
even after adopting the policy of economic liberalization in the 1980s and 1990s. This
involved keeping a large number of state-owned enterprises (SOEs) under its control and
regulating prices.
For economic development, both countries started their development planning by formulating
periodic plans. The first Five-Year Economic Development Plan, which was adopted by the
new military government in 1961 in Korea, placed a high priority on import substitution and
considered exports as a mere remedy for the foreign exchange shortage. However, a sharp
turnaround in the policy took place in 1964 after the rapid export expansion (Sakong and
Koh, 2010, p.136). In fact, the countrys first five-year plan (196266) proved to be a

14

catalyst for the remarkable transformation of the economy, enabling Korea to achieve the
status of a newly industrializing country (NIC) in 1970 (Harvie and Lee, 2003, p.1).
Nepal also started development planning process as early as in 1956, earlier than Korea. The
government has continued producing plans since then. During the Panchayat regime,
infrastructure, agriculture and food production, integrated rural development, basic needs and
poverty alleviation were given high priority in planning (Panday, 2009). However, very little
of the official policy outlined in planning documents actually translated into effective
implementation at the grass roots level (Seddon, 1988, p.237). This trend continues even
today in the post-Panchayat era. Effective translation of government policy into practice
requires the commitment and capacity of the bureaucracy, from top to bottom, which is in
serious deficit in Nepal. Planning is still remained just a "rhetoric", despite some progress in
areas like transportation, communication, health, drinking water, literacy and student
enrolment. These achievements remained disappointing on the whole not matched with
necessity and the requirement of the country.

4.4 Foreign Aid

Aid from the UN and the U.S. was crucial in the reconstruction of the Korean economy after
liberation from Japan. During 1945-1950, a total of 585 million dollars in aid was provided
by the U.S. and the UN (Sakong and Koh, 2010, p.126). The amount of aid as a proportion to
GDP reached as high as 23 percent in 1957 (Sakong and Koh, 2010, p.126 ). In addition, the
development grant from Japan also made a huge contribution to financing infrastructure
investment projects and fostering industrial development in Korea. Foreign aid was used by
the Korean government to buy fertilizer to increase food production; develop energy
industries, such as electricity and coal, and build infrastructure and facilities needed for the
countrys post-war restoration (Kim and Koh, 2010, p.103). Korea also received U.S.
economic aid for its military participation in the Vietnam war (1965-1973) and Korean
companies benefited from supplying services, including the building of military facilities and
products, such as uniforms, to the U.S. armed forces serving in Vietnam (Kim and Koh,
2010, p.105).
Foreign aid has also played an important role in the development efforts of Nepal. After
1951, the hermit kingdom Nepal was exposed to the world and started receiving foreign aid
(Gurung, 1989). Nepal received foreign aid for Village Development Project, for the first
time in 1951, from the US (Khadka, 1991). The American aid was soon followed by India,
China and then the USSR came to the scene in 1956 and 1958, respectively. The UN started
assisting Nepal in 1952 (Gurung, 1989). Other several countries also started providing aid to
Nepal20.
Moreover, among international agencies, the Colombo Plan21 had an early
association with Nepal going back to 1950 and was later followed by the Ford Foundation,
World Bank and Asian Development Bank. The quantity of foreign aid during the first two
decades (1951-1970) totaled more than 178 million dollars (Gurung, 1989, p67), which was
very low compared to the amount received by Korea.

20

For example, U.K., Switzerland, Australia, New Zealand, Germany, Canada, Israel, France, and

Japan.
21
The Colombo plan made training facilities available to over 3700 Nepalese students between 1950
and 1968.
15

The 1970s, further, saw the beginning of a massive involvement of multilateral agencies in
Nepal (Riaz and Basu, 2007). By the 1990s, INGOs also became key players for
development activities in Nepal. By the late 1980s, the share of foreign aid increased to
almost 13 percent of GDP (Gurung, 1989). In recent years, foreign aid supports a significant
portion of the development budget. Despite inflows of foreign aid from different sources, the
plight of the Nepalese economy has not improved as expected. In reality, fees to the foreign
advisors for technical assistance contributed to a large proportion of the aid component
resulting in a situation of "over-advised and undernourished" (Gurung, 1989, p.69). During
the Panchayat era, the monarchical regime also appropriated some part of foreign aid. Due to
low absorption and administrative incapacity, Nepal has been, suffering from a problem of
"aid indigestion (Gurung, 1989) and "aid leakage".
4.5 Developing Human Capital
Korea's substantial investment in education after independence and the war had provided a
well educated labor force needed for industrialization (Harvie and Lee, 2003). The Korean
government implemented a six year plan (1954-1959) for achieving compulsory primary
education. Educational opportunities expanded rapidly thereafter, with the enrollment rate in
elementary school exceeding 90 percent by 1970 (Koh, et.al. 2010, p.229). Starting in 1968,
the government successfully managed to produce more students majoring in science than in
liberal arts by imposing student quotas on universities (Koh, et. al. 2010, p.239). Expenditure
on education exceeded 10 per cent of GDP and the percentage of high school graduates
advancing to college or university during the 1980s was the second highest in the world after
the US (Harvie and Lee, 2008, p.15). The rapid expansion of education was possible due to
both the cultural factors and timely government policies. Korea also has had a long tradition
of putting the highest priority on education (Koh, et.al. 2010, p.236).
In contrast, a majority of Nepalese people are yet to realize the importance of education.
Before 1950, only a handful of people were getting schooling since the expansion of schools
commenced in 1951 (Gurung, 1989, p.101). In 1954, National Education Planning
Commission was established and, in 1968, the National Educational Advisory Board was
constituted. Finally, in 1971, the New Educational System was introduced as an integral part
of the Fourth five year plan (1970-1975). In 1975, the government instituted a policy of free
and compulsory primary education. Despite all these efforts, by 2011, the overall literacy rate
have reached just 65.9 percent and female literacy stood at 57.4 percent (Census 2011).
Thus, one thirds of the population and nearly half of women are still illiterate.

5. Lessons to Nepal for Economic Development

We are now in the twenty-first century and the world has been embracing globalization and
liberalization supported by the rapid expansion of transportation and communication,
especially the development of information technology. Similarly, the global political
environment has changed. Now no more cold war, but still geo-politics and international
actors can play the important role in economic development in any country. Environmental
concerns, global warming and sustainable development are getting priority in recent decades.
As shown above, Nepal distinctly lies behind in the ladder of economic development despite
having potentialities and following some similar policies and programs as in Korea in the
past. The success of Korea showed that economic development is possible within the short
16

period of time if right policies and programs are formulated and implemented effectively with
active involvement of the government and private sector. Hence, despite difference in
circumstances, Nepal can learn the following relevant lessons from Korea's development
experience to embark on economic development.
(1) Korean experience shows that political stability is vital for economic development. In
addition, there should be political commitment for development.
(2) Given the geographical constraints, and the context of liberalization and globalization,
Nepal may not able to follow the same industrial process as in Korea, However, Nepal
still has a huge supply of uneducated labor force and there is over-dependency on
agriculture. Thus, Nepal can still focus on establishing labor-intensive industries which
can capture the benefit of international value chain because China and India are moving
upward on it. In addition, as a landlocked country, access to sea port is costly. However,
Nepal can think of developing the software industry by utilizing informational
technology and educated manpower.
(3) Human capital is very vital for economic development and Nepal is yet to receive
demographic dividend. The situation of human capital is still very low as reflected by
the existing literacy rate and low level of technical skills. Obviously, country needs
efficient and skilled manpower for economic prosperity. The main reason for Korean
success was due to well-educated people. Hence, Nepal needs to focus on developing
necessary human capital for development.
(4) Since the mid-1980s, with the adoption of economic liberalization policy, the role of
government has been minimized and the role of private sector has been enhanced.
However, Korean experience shows that the government should play an active role in
navigating the development process. Without the development of physical infrastructure
and social capital like education and health, the private sector cannot flourish because
of market failures. Hence, the government should focus on infrastructure development
and providing quality education and health services.
(5) Nepal has tremendous potential given by the nature on certain sectors, such as
hydropower, tourism, and herbs. These natural resources should be harnessed
effectively. Without the adequate supply of energy, modern development and economic
activities cannot take place. Korea achieved self-sufficiency in energy production in the
early 1960s. Foreign aid, foreign loans and remittances can effectively be used for the
development of hydropower. Moreover, development of the tourism industry, in which
Nepal has the comparative advantage because of natural diversity and several mountain
peaks, can become the important source of foreign currency.
(6) Nepal has been maintaining the pegged exchange rate with Indian currency since 1993.
The same level of peg has been maintained for more than 20 years. It shows that Nepal
has not been using the exchange rate actively to promote exports. During the high
growth phase, Korea used to manage the exchange rate proactively for export
promotion. Nepal needs to use the exchange rate to support export promotion.
(7) With the adoption of financial liberalization, the financial sector has been expanding
substantially by establishing many conventional deposit-taking institutions. However,
Nepal lacks specialized financial institutions for providing financial resources to
specific sectors, such as industry, agriculture, infrastructure and exports. Such
specialized institutions should be established so that these sectors can get necessary
financial resources.
(8) Following the multiparty democratic system, workers' unions have been mushrooming
and trade union militancy has been increasing. Industrial disputes are common in almost
all industrial establishments, including government offices and public enterprises.
17

Korean experience shows that excessive trade union activities should be regulated and
controlled along with providing social security, healthy work environment and
reasonable level of salary.
(9) Nepal attempted to carry out land reform in the past, but failed to be effective. Through
land reform, Korea not only increased agricultural productivity, but also generated
resources and support for industrial development. Distribution of land is still highly
unequal in Nepal and the absentee landlords are still prevalent. Hence, effective land
reform should be carried out which will eliminate the dual ownership of land and
increase productivity.
(10) Nepal has been receiving foreign aid for a long time. However, it has not been utilized
effectively. Donors should provide aid to fulfill infrastructure gap and the government
should use it efficiently and effectively.
(11) R & D is not getting priority so far. R & D is very important to identify areas of
comparative advantage and technological transfer. Korea spent substantial amount on R
& D at the beginning of industrialization, which continues even today. Nepal should
adopt this approach.
(12) Nepal needs to change work culture by paying due attention to time, learning from
Korea. Hardly any development projects are completed on time in Nepal. In addition,
women's participation in work should be increased by treating them equally, since they
constitute more than half of the population.

6. Conclusions
The paper has assessed the process of economic development in Korea and Nepal from
multidimensional perspectives. The development gap has been widening between Korea and
Nepal since 1960. Several developmental indicators demonstrate the dismal state of the
Nepalese economy. While Korea succeeded in transforming its economy from an
underdeveloped agrarian economy to an advanced industrial economy within three decades,
1961-1989, Nepal failed to do so despite making attempts to develop. Nepal is different from
Korea in its history, geography, culture and has different initial conditions. All of these
factors are responsible for Nepal's underdevelopment.
Despite following some similar policies and approaches, such as import substitution,
development planning, government intervention, land reform, financial repression and
autocratic regime during the Panchayat era, Nepal failed to achieve the expected success
because of the lack of commitment and effective implementation of policies and programs.
The Nepalese government could not play the successive role of development state as in Korea
on account of monarchical system with feudal character. As a result, Nepal is still a precapitalist economy, dominated by subsistence agriculture. Riaz and Basu (2007, p.91) righty
say that all stakeholders of development, such as politicians, planners, bureaucrats,
entrepreneurs and donors, are ineffective to arrest the feedback loop of poverty in Nepal.
Time has changed; Nepal cannot go back to the 1950s and 1960s. Plus there are several
differences between the two countries. Hence, Nepal may not be able to follow similar path
that Korea followed in the past. However, Nepal needs to adopt many common approaches
that Korea followed to bring the economy into the take-off stage, which includes
development of education, infrastructure and focus on R&D. Nepal should formulate right
policies by analyzing the internal and external environments. More importantly, Nepal
18

should implement policies and programs effectively. Nepal can strategically utilize money
received from foreign aid and remittance for the development of domestic economy, giving
due attention to its own potentialities. For this, the government cannot just let the market to
do all things, but it should play an active role and at the same time, the private sector should
also be promoted.
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20

Appendix 1: Tenure of Rulers since 1950

Korea
President
Ree Syngman
Yun Bo-seon
Park Chung-hee
Chun Doo- hwan
Roh Tae- woo
Kim Young- sam
Kim Dae- jung
Roh Moo- hyun
Lee Myung- bak
Park Geun-hye

Nepal
Tenure (yrs) King / Prime
Tenure (yrs)
Minister
1948-1960
King Tribhuvan
1951-1955
1960- 1961# King Mahendra
1955 -1972
1961-1979
King Birendra
1972 -1990
1980-1988
Constitutional Monarchy with Multiparty
System (1990-2008)
1988-1993
K. P. Bhattarai
13 months
1993-1998
G.P. Koirala
43 months
1998-2003
M.M. Adhikari
9 months
2003-2008
S.B. Deuba
18 months
2008-2013
L.B.Chand
3months
2013S.B. Thapa
3 month
G.P. Koirala*
14 months
K. P. Bhattarai
10 months
G.P. Koirala
28 months
S.B. Deuba
14 months
L.B. Chand
7 months
S.B.Thapa
11 months
S.B. Deuba
8 months
King Gyanendra
14 months
G.P. Koirala
(2006-2008) 2 yrs
After Being Republic in 2008
P.K. Dahal
9 months
M.K. Nepal
20 months
J.N. Khanal
6 month
B.R. Bhattarai
19 months
K.R. Regmi
11 months
S. Koirala
2014-

# parliamentary system, *3 times with different coalition in this time.

Source:

http://en.wikipedia.org/wiki/History_of_South_Korea

http://www.bbc.com/news/world-south-asia-12499391

21

and