Democracy and Development in Nepal: An Analysis

By Chattra Bahadur
UWB received this article in email

As opposed to the findings of the researches, the parliamentary system in Nepal has not been able to influence liberalization process significantly. It has failed to provide direction and initiate actions to alter structural policies.

There is always never-ending debate on the forms of governance and specific institutions and/or policies that enhance economic performance and promote economic growth, hence lead to economic development of a country. This debate usually evokes strong comments and equally sharp criticisms from proponents holding diverse schools of thoughts. Moreover, researches have failed to provide a single, but correct, conclusion.

Contemporary researches have found empirically that institutionalization of regulation and trade to be essential for economic performance. At the same time, the process and extent of institutionalization is heavily influenced by the history and geography. Though commonly held view that “good institutions are necessary for successful development” is supported by most empirical researches, it is unclear which societal institution provides impetus to undertake growth-promoting policies. Institution is defined as broad regulatory and trade regime followed under a political arrangement; though “social infrastructure”, “economic institutions”, “structural policy” or simply “institutions” are also used to convey similar meaning in different researches.

Nepalese economy was not ready to absorb such rapid pace of liberalization… Instead of reducing, haphazard implementation of liberalization provided continuity and strengthened existent urban-rural divide further.

In Nepal’s case, the trade regime was liberalized at a rapid pace though regulatory framework remained weak. This had taken place especially after political change during the decade of 90s: one of the compelling reasons may be that the countries around the world were liberalizing their economy during the period and Nepal also adopted ‘me-too’ approach. More significant rationale for liberalization in Nepal was donor-driven since larger portion of financial aid (to be received) had inclusive conditionality of liberalization of the economy. Because of this, policymaking approach became increasingly donor-driven without evaluation of the requirement of the economy itself.

Though the economy was liberalized at the policymaking level, the implementation lacked direction because of varied reasons. Perhaps the Nepalese economy was not ready to absorb such rapid pace of liberalization and gradualism may have been better policy option (which is subject to further research). And when the regulatory framework to support and enhance liberalization remained weak, both in design and implementation, liberalization itself became ‘half-baked’ process lacking any direction. Thus, liberalization could neither institutionalize (create good institutions for economic development) nor provide benefit to the larger section of population as envisaged. Instead of reducing, haphazard implementation of liberalization provided continuity and strengthened existent urban-rural divide further.

[D]uring Panchayat regime, ‘Gaufarka Abhiyan’ was implemented which may have yielded some economic benefit though it is disputed and it is claimed with it had strong populist bias.

Of course, which form of governance promotes institutionalization process, hence economic development, is a pertinent issue at this stage. The commonly held assumption is that “democracy promotes economic development” , suggesting that causality (direction) flows from democracy to economic development. And the case that democracy promotes development rests on the central idea that the political institutions critical to economic development are more likely to exist and function effectively under democratic rule. Democratic institutions may strengthen or defend the rule of law; but the same institutions also have the capacity to undermine the rule of law. This causality, from democracy to development, has been proved by some researchers.

At the same time, however, “evidence that democratizations yield subsequent economic growth is quite weak and political regimes may still influence economic growth”. Persson and Tabellini investigate this relationship between democratization and economic liberalization in their research paper. They find that both democratization and economic liberalization quicken of the pace of growth; yet, the sequence of reforms assumes more significance. To explain further, both reforms have a significant and positive effect on growth, with economic reforms having the stronger effect. It presents empirical evidence that the countries that liberalize their economy before extending political rights tend to achieve growth faster and develop faster. Giavazzi and Tavellini have also addressed this debate regarding “liberalization after democracy” or “democracy after liberalization”. They also found that “democracy after liberalization” have stronger effect on growth. The credible suggested reasons for this occurrence are:

(1) young democracies in closed economic environments may fall in redistributive conflict and populist policies; and

(2) young democracies in open economies are more likely to concentrate on gaining economic efficiency.

Nepal does not fall within any specific model when we only look at the theoretical background. Reforms, leading to liberalization, had already been initiated in some sectors (especially in financial sector) before advent of democracy in 1990. Hence we cannot classify Nepal under category of a country in a closed economic environment in a strictest sense for this reason. However, policy decisions during and after 90s strongly show redistributive and populist bias. The policy decision pertaining to reduction in land ceilings had strong political and social justice logic than economic one. The proponents of this policy decision see reduction in land ceiling, and consequent redistribution, as one of the ways to correct distortion in wealth distribution. The opponents provide justification that land redistribution creates farmers with small land holdings and they would, in anyway, remain at subsistence level because they cannot take advantage of ‘economies of scale’.

Instead, they advise the government to generate other sources of employment opportunities, if it seriously intends correct wealth distribution distortion and income inequality. And another issue that should be given priority, but has fallen in populist bias, is rural focus. Earlier, during Panchayat regime, ‘Gaufarka Abhiyan’ was implemented which may have yielded some economic benefit though it is disputed and it is claimed with it had strong populist bias. During democracy, the CPN (UML) introduced Build Your Own Village concept in its nine-month rule for extensive rural development in decentralized manner. On a theoretical basis, it had all the elements to alter the face of rural Nepal – budgetary allocation, concept of decentralization, etc.

However, implementation process again lacked vital direction and it achieved less than desired outcome. It provided invaluable lesson that only channeling resources, without mechanism to spend in transparent manner, does not bring in desired results. Only consolation that this program provided is that rural focus has been imbibed prominently in successive plans and policies of the subsequent governments since then.

Though democracy may be emphasized, democracy has many features: form of a government and electoral rule. As a form of government, there is a broad classification suggesting parliamentary and presidential; as an electoral rule, there is a classification of proportionate and majoritarian. And Persson emphasizes that the specific political arrangement – the form of democracy, rather than democracy per se – may be one of the links between history, current policy and economic development. He also adds that if political arrangements influence fiscal policy and corruption, they are likely to be reflected in structural policies (such as regulation to protect property rights, non-protective trade mechanism etc) that promote economic development; and if history and culture shape important societal institutions, they are likely to be reflected in the design of political institutions (such as form of government or the electoral system etc). His research concludes that parliamentary democracy and age of democracy have strong positive impact on economic performance through structural policies. His research includes 140 countries during the period 1960 to 2000.

The question of permanent and temporary reforms is also evaluated which gives valid conclusion that permanent reforms, rather than temporary ones, have stronger effect on structural policies. He deduces that reforms initiated by the government in parliamentary setup positively influence the liberalization of trade and the protection of property rights; and possible explanation is that parliamentary democracy is able to alter structural policies and expand government spending significantly. This conclusion also validates the finding of another research that parliamentary system help produce balanced spending programs (in development areas) that serve broad and stable majority of voters than other forms of democratic setup because of requirement of confidence measure in parliamentary system is inherent.

From Nepalese perspective, structural polices, as mentioned above, seem to have driven by the donors’ desires instead of domestic economic needs. As opposed to the findings of the researches, the parliamentary system in Nepal has not been able to influence liberalization process significantly. It has failed to provide direction and initiate actions to alter structural policies. In fact, the Nepalese policymakers have shown a strong tendency to devote time in partisan politics wherein crucial economic issues are continually neglected either because of lack of knowledge or inability to prioritize. For instance, electoral manifesto of any political party provides elusive indication, at the best, of what economic policies it will adopt and how it plans to usher development.

[T]he Women Reservation declaration of the reinstated Parliament only provided reservation in the government jobs and conveniently ignored their own parties.

The concerned party-leaders either evade or provide superficial answers to such questions. It clearly shows that state of the economy and what needs to be done turns out to be least-prioritized area. They strongly exhibit that ‘politics-is-panacea’ and ‘as-and-when-it-comes’ tendency. In such instance, it is predictable that the structural (economic) polices will be dominated by the donor agencies.
Moreover, our historical and cultural background may have influenced our upbringing to such an extent that we are not able to overcome their influence. In the modern history of Nepal, it has been individual and/or community-based politics where a particular individual or community did not allow other individuals and/or communities participate in decision-making process.

To maintain and continue such domination, the whole process was kept opaque. And with opaque process in place, there is no need to build responsibility and accountability procedure. Sadly, the same trend is evident even after democracy within the political parties and government bureaucracy. That is the reason why our electoral practice is one of least reformed area where political parties, for instance, do not have to maintain any books of accounts or audit those accounts or disclose the amount of donations collected. Such an arrangement induces corruption for party funds. In addition, they have shown no inclination to introduce laws that enforce strict disclosure norms.

As of recently, the Women Reservation declaration of the reinstated Parliament only provided reservation in the government jobs and conveniently ignored their own parties. And when policymakers at the highest decision-making body, representing the political parties, engage in dubious practices and promote double standards themselves, it is unwise to expect them to devise transparent and workable mechanism in the first place.
Finally, regarding this issue of link between democracy and economic growth, Gilles concludes that “there is no ironclad law defining the relationship between democracy and economic growth and the effects, where they are demonstrated, appear to be more subtle and indirect”. He rightly suggests quality of governance as an important influence on economic growth. Unfortunately, the quality of governance is an unknown phrase to our policymakers since ‘politics-is-panacea’ is their only mantra.

References:

1. Persson, T., (March 2005), “Forms of Democracy, Policy and Economic Development”, Working Paper 11171, NBER, Cambridge

2. Persson, T., Roland, G., and Tabellini, G., (2000), “Comparative Politics and Public Finance”, Journal of Political and Public Finance 108, pp. 1121-1161

3. Gilles, D., (2005), “Democracy and Economic Development”, Policy Matters Studies, International Development Series, IRPP, Montreal