Despite social and economic reforms begun in the 1950s, Nepal's per capita income was only $1,100 (PPP) in 1998, and general living standards are low. The economy is based on subsistence agriculture, which engages about 80% of the labor force but is inefficiently organized and limited by a shortage of arable land in relation to population. Eight development plans, extending from 1955 to 1992, have slowly built up the nation's infrastructure. Nevertheless, the industrial sector is still small and dominated by traditional handicrafts, spinning and weaving, and similar occupations. Growth in medium-scale and cottage industry-based production of carpets and garments for export, expanding tourism, and some government-promoted development of heavy industry sustained an average GDP growth rate of over 5% from 1980–88. In 1989/90, Nepal weathered a major trade and transit dispute with India, maintaining a GDP growth rate of 2%, despite the potentially debilitating tariffs suddenly placed on trade with its largest import supplier and external market.
Nepal's economic potential is by no means insignificant. Ka¯thmāndu Valley and the Terai zone are fertile areas; there is great forest wealth, including valuable medicinal plants such as pyrethrum, belladonna, and ipecac; deposits of several minerals are known to exist; and swift Himalayan rivers offer great possibilities for hydroelectric development.
The principal challenge for the Nepalese is to provide for a rising and unequally distributed population and to achieve material progress without irrevocably depleting the environmental resource base. Structural adjustment measures initiated in 1989 have reduced the regulation of industry and imports, and are supported by similar liberalization in India, to which Nepal's economy is closely tied. However, aggregate economic growth remained sluggish during the early 1990s. Gross domestic product growth declined from 4.6% in 1990/91 to only 2.1% in 1991/92, due in large part to declining agricultural output following poor weather. Gross domestic product growth averaged an annual rate of 5% between 1988 and 1998. International actors fund more than 60% of Nepal's development budget and account for more than 28% of total budgetary expenditures. In 1995 Nepal joined the South Asian Association for Regional Cooperation (SAARC) in the South Asian Preferential Trade Area, scheduling a free trade area by 2001.