Nepal and Bhutan: economic growth in two Shangri‐Las

Purpose - The purpose of this paper is to examine the economic development strategies of Nepal and Bhutan to understand the economic factors that have contributed to economic growth. Design/methodology/approach - After a brief discussion of each country's modern history, their economies are examined together with their development strategies during the past half century. Standard economic growth models for Nepal and Bhutan are developed and estimated. To ensure the stationarity of the data series, tests of unit root are conducted. Further, a cointegration test is conducted and an appropriate error‐correction model is developed. Findings - The results of the estimations reveal that domestic capital has been a significant source of economic growth in Nepal whereas foreign aid has not had any appreciable effect on growth. In the case of Bhutan, foreign assistance has been a significant source of growth while domestic capital has not. Research limitations/implications - Bhutan and Nepal also differ in terms of non‐economic factors such as culture, language, politics, and religion. These factors may also help to explain the difference in economic performance of these countries. While important, these issues are beyond the scope this paper and indicate directions for further research. Originality/value - It is one of the first attempts to compare the economic growth strategies of Nepal and Bhutan. It may provide useful insight to policymakers and others interested in economic growth in Nepal, Bhutan and other developing countries.