From Potential to Prosperity: How Nepal Can Fully Harness Its Human Capital

The Nepal Human Capital Review finds that a child born in Nepal today will achieve only half of their potential productivity and just 18% when factoring in current employment rates due to poor education, health outcomes, and limited job opportunities. It calls for urgent, targeted investments and reforms to fully develop and utilize the nation’s human capital for inclusive growth.

The World Bank’s Nepal Human Capital Review, produced using data from the Nepal Living Standards Survey IV 2022–2023, was compiled by the National Planning Commission and the National Statistics Office. It presents an unflinching picture of a country brimming with promise yet hamstrung by structural weaknesses in education, health, and labor markets. It opens with the story of Sujata, a bright five-year-old from rural Ribdikot whose dream of becoming a doctor is clouded by her family’s poverty, fragile income from ginger farming, and a history of health troubles. Her life is a metaphor for millions of young Nepalis who live in a world of “ifs”: if they receive quality schooling, if they stay healthy, and if they can find meaningful work. The report uses the Human Capital Index (HCI) and the Utilization-Adjusted Human Capital Index (UHCI) to measure this reality: a child born in Nepal today is expected to achieve only 50 percent of their potential productivity by adulthood, and when accounting for current employment rates, that figure plunges to just 18 percent.

Gains Made, but Deep Gaps Remain

Over the past decades, Nepal has improved school enrollment, life expectancy, and child survival rates, but these gains mask deep inequalities. One-third of the working-age population has not completed primary education, and one in four children under five is stunted, with the highest rates in poor rural provinces such as Karnali. While the average child is expected to complete 12.3 years of schooling, the effective learning level is only 7.2 years due to poor educational quality. Literacy rates are consistently lower among women, the rural poor, and marginalized groups. On the health side, public service delivery often falls below government standards, and non-communicable diseases account for roughly 70 percent of deaths. Air pollution ranks among the highest in the world, cutting life expectancy by nearly 4.6 years and impairing children’s cognitive development. Chronic underinvestment compounds these problems: education spending is 3.7 percent of GDP, health spending 2.1 percent, both far below international recommendations, and returns on spending lag behind peer countries.

Federalism’s Promise and Pitfalls

The 2015 shift to a federal system was meant to bring decision-making closer to communities and improve service delivery. But unclear roles, poor coordination, and overreliance on conditional grants from the center have undermined its potential. Delays in key legislation have slowed reforms, while fragmented programs in education, health, and social protection dilute impact. These weaknesses are exacerbated by the country’s vulnerability to disasters, including earthquakes, floods, and pandemics, which repeatedly disrupt schools, clinics, and livelihoods. Disaster preparedness and social safety nets remain inadequate, leaving the poorest disproportionately exposed. The report makes clear that without resolving these governance bottlenecks, Nepal will struggle to convert budgetary spending into meaningful outcomes for its people.

A Labor Market Stuck in Low Gear

Labor market realities are stark. Overall labor force participation stands at 39 percent, with female participation at just 26 percent, among the lowest for lower-middle-income countries, and youth face the greatest disadvantage. Over a third of young people aged 15–24 are neither in education, employment, nor training. Job creation has lagged far behind the growing working-age population, and over 80 percent of employment is informal, offering low pay, no benefits, and little security. Informal workers earn, on average, 29 percent less than their formal counterparts. Small farms and microenterprises could be engines of job creation but face major hurdles, including poor access to credit, limited business support, and burdensome regulations. Without targeted support, these sectors cannot absorb the expanding workforce, and the country risks wasting the demographic dividend it is on the cusp of receiving.

Migration: Lifeline and Liability

With limited quality jobs at home, millions of Nepalis, especially young men, have sought work abroad. By 2020, 2.6 million citizens, or 8 percent of the population, were living overseas, making Nepal one of South Asia’s largest migrant-sending nations. Remittances now account for nearly a quarter of GDP, making them a powerful driver of poverty reduction and enabling families to invest in education, health, and housing. Yet this reliance also reflects a structural weakness: much of Nepal’s human capital is deployed overseas, contributing to other economies instead of the domestic one. For returnees, reintegration is fraught with challenges, as there are few programs to match their skills to local job opportunities. Without addressing this, the country will continue to lose the productive potential of its most mobile and ambitious workers.

The Nepal Human Capital Review warns that without urgent action, a combination of environmental pressures, poor labor absorption, and underinvestment could lock the country into a low-growth, low-opportunity trap. It calls for transformative investment in human capital, raising education and health spending to meet global benchmarks, targeting resources to lagging provinces, reducing stunting through targeted nutrition and maternal-child health programs, and improving early childhood and foundational education. It urges reforms to expand apprenticeships, support women’s participation through childcare and family-friendly policies, and improve access to finance for micro and small enterprises. Social protection should be unified, shock-responsive, and extended to informal workers, while education and health systems must be made resilient to disasters. The report’s underlying message is urgent and unequivocal: Nepal’s path to prosperity hinges on turning the unrealized potential of children like Sujata into fully developed human capital that drives inclusive economic growth. Without this, the gap between aspiration and achievement will only widen; with it, the country could unlock a transformative era of productivity, resilience, and shared prosperity.