Knowledge-based Economy: Context of Nepal

The world economy has witnessed dynamic growth trajectory from Agricultural revolution and industrial revolution to the present stage. In the distant past, agricultural revolution shaped the world growth trajectory for a long period of time. In the eighteenth century, the industrial revolution appeared as the prime driver of growth. However, with the globalization and rapid growth in the use of information technology since the 1980s, a distinct discourse has taken place in which human skill, creativity and innovations, not the endowment of natural resources and physical assets, are assumed to determine the long run growth trajectory of the economies.  It has been named Knowledge-based economy or K-economy. 

The concept of K-economy has been supported by the recent growth theories including the neoclassical growth theory by Robert Solow, the Innovation Theory by Schumpeter and the New Growth Theories. These theories advocate for the investment in human knowledge as the driver of long-term growth and focus on the technological advancement created by human capabilities, creativity and innovations.

In the present context, the sources and pattern of the world growth has been redefined by the knowledge-based economy. The economies which have adapted to the new growth drivers have been successful in achieving high and sustained growth through higher total factor productivity. Empirical studies also show that there is a strong positive correlation between knowledge accumulation and per capita income. One of the most cited examples in this context is that of China, Korea and Mexico. During the period from 1990 to 2018, China was able to achieve a consistent positive total factor productivity growth of 3.9 percent while that of South Korea was 0.83 percent and for Mexico, such growth was negative by 0.43 percent. As a consequence, GDP become 38-fold in China during the period, 6-fold in South Korea but it became only 4-fold in Mexico. And, per capita GDP became 31-fold in China, 5-fold in Korea and only 3fold in Mexico. Likewise, a study done by the World Bank shows that about two-thirds of the difference in per capita income in Ghana and South Korea during 1960 to 2005 was due to the difference in knowledge accumulation or growth in total factor productivity.

One another important aspect in the K-economy is which sector has the long-term potential of being the growth driver of the economy. Though Agriculture sector is still considered a potential driver of the economy in Nepal, it is the services sector that can lead growth in the medium to long term, given the limited expansion potential in the agriculture sector. In case of the high-income countries too, services sector has been the primary driver of growth during the later stages. At present, the average share of the services sector in GDP in high income countries is 70 percent while such share is increasing in the emerging market economies. During the last five decades, while Agriculture sector in Nepal has grown by 3 percent on average, the growth of the services sector has been around 5 percent. As a consequence, the share of Agriculture has declined from 72 percent in 1975 to 24 percent now whereas the share of the services sector has increased to 62 percent. If we decompose the annual growth contribution by sector, we see that the more-than-half is contributed by the services sector. During the last three years, the contribution of the services sector to growth stood at 63 percent while that of agriculture at 19 percent and industry at 18 percent.

In the financial sector, use of information technology has increased rapidly which has played a crucial role in laying the foundation of a digital economy. And there is more potential in this sector for further growth. These facts show that services sector has the potential to lead our growth trajectory. 

During the recent years, services export has also been increased in Nepal in line with the expansion of the services sector. During the last 25 years, while the merchandize exports has increased to 2.6-fold, services export has increased to 8.5-fold and reached Rs. 252 billion in the previous fiscal year. In terms of volume, service sector exports has been higher that merchandize exports during the last decade with the exception of two years during the COVID crisis. 

Nepal has introduced a number of initiatives to exploit the opportunities from the knowledge economy. One of the goals of the sixteenth plan is human capital formation and its full utilization. The government of Nepal has implemented Digital Nepal Framework to utilize the potentials from the growth in ICT sector. Similarly, the current budget of the government has declared the coming decade as Information Technology Decade and aims for an ICT export of Rs. 3 trillion during the decade. Significant progress has been achieved in digital payment infrastructure as well as payment systems. Access to information and technology has significantly improved. However, we still lag behind in terms of the indicators of knowledge economy compared to many other countries. The Knowledge Economy Index published by the World Bank has indicated the areas of improvement for us. In particular, there is a need for improvement in access to quality education, reliable ICT infrastructure, and sufficient R&D expenditure by the government as well as private sector, among others.    

To harness the potential of the knowledge economy, we need to concentrate our efforts in the following four areas: 

1. Development of policy, institutional and regulatory framework that promote human capital and creativity 

2.   Reliable and quality ICT infrastructure 

3.  Sufficient R&D investment from government as well as private sector to encourage innovations and creativity and 

4.  Sufficient investment in quality education for human capital formation

Many countries have come forward with their own roadmaps, projects and commissions to work on these four pillars of knowledge-based economy. For example: the e-Korea Vision (2002) in South Korea, India Vision (2020) in India, the e-Japan Strategy (2001) in Japan. We have also opportunities to draw lessons from the experiences of South Korea, Singapore, Finland, China, Malaysia, Thailand and others. If we can work on these strategic pillars in an integrated manner and implement our plans as well as policies effectively, we can achieve high and sustained growth supported by higher factor productivity and at the same time we can strengthen our external sector through higher service exports. 

To conclude, Knowledge economy is not just an abstract concept; it holds a solid promise for our bright future. It not only provides us opportunities but also in a sense it is mandatory. 

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Published on Feb 18, 2025. 

Author email: siddhabhatta@gmail.com