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

12 thoughts on “Democracy and Development in Nepal: An Analysis”

  1. Severly limited analysis. It doesnt even address the fact that none of the Nepalese government has been able to come up with a priority list of thing to do , forget even about how to implement it. Perhaps you should first read books by Amartya Sen and Stiglitz

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  2. Priority list was defined in the 5-year Plan documents. And Stiglitz talks about ills of extreme trade liberalization and bad effects it has on the third world countries. I do not see how it is related to this analysis, which deals with different topic.

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  3. Chattra Bahadur ji,

    I read your article with a great delight. It is a very thoghtful article. It gave me a deep impression that you have a clear developmental perepective. Of course, always there is a room for diaagreement and therefore we can argue and debate for ever, mostly with normative backup.

    In short, your article is readable by all, especially by politicians.

    I would like to be in touch with you and get your email address. Would you kindly provide me your email address?

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  4. Well, for me this is an intellectual garbage. this is a work which consists in copying and pasting purely academic papers of weird professors.
    About 5 year plan, lets face the fact- agriculture was never given a priority. Remember the tube well scandal of ADB or Makaimara instance. The other priorities were wish list which had nothing to do with national capacity.
    Stiglitz talks about how spoon fed policy of Washignton Concensus has been devastating to developing countries and why all those prescriptions doesnt work. Give me a name of the country which developed due to policy prescrptions of these self declared intellectuals.
    The key to development is industrialization and export. Asian tiger proved it, China is proving it and if you believe that by liberalizing trade, (trade- we dont have it), you will gain that much- Thumbs up

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  5. Mr. Santosh,

    Your comments are well received. However, this article also does not intend to ‘direct’ nor ‘profess’. Nor the academic professors are providing policy prescrlptions if that is your line of thinking. It only indicates ‘as what had happened’ and ‘past experiences’ of about 140 countries (consequences of their actions)in a generalized manner. The article does not analyze why those countries took those policy actions and who pressurized them to do so. Nor their work supports or rejects so called ‘Washington Consensus’ because that is not the area of their work covered.

    As for the question of Dr. Stiglitz, what he has time and again talked about excess liberalization at the pressure of IMF and WB, and consequent ills, it has brought because of manipulative practices of MNCs. And this article does not cover those issues…it only talks about by certain standards of the world-wide experiences, we have failed somewhere. Moreover, it does not intend to provide ‘correct’ policy prescriptions because there cannot be single correct policy implementation.

    I cannot agree with you on your criticism on these grounds.

    As far as quoting or ‘replicating’ academic work, I have given references where I have quoted. And quoting foreign academics is concerned, it has to be done because Nepalese have no time to research, nor study. For most of us, as I have mentioned in the article, ‘politics is panacea’ which clearly is not the case.

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  6. Mr. Santosh,

    As for 5-year plan, it depends on how you would classify proposed expenditure on Agricultural area. Unfortunately separate data for these two sectors are not available. From Second Plan – Agriculture and Irrigation were clubbed together and consolidated figure are available in the offical data. Implementation, thus achievement, is something different; but from the budgetary allocation point, it looks like Agriculture and Irrigation has been given pretty high priority.

    The statistics is as follows:

    First Plan (2013-2018 BS): Agriculture 19.24% Irrigation 21.21% totaling about 40% [Highest Allocation]
    Second Plan (2019-2022 BS): 15.68% [Fourth on Allocation]
    Third Plan (2022-2027 BS): 25.90% [Second highest]
    Fourth Plan (2027-2032 BS): 27.24% [Second highest]
    Fifth Plan (2032-2037 BS): 33.49% [Highest]
    Sixth Plan (2037-2042 BS): 35.0% [Highest]
    Seventh Plan (2042-2047 BS): 34.3% [Highest]
    Eighth Plan (2049-2054 BS): 28.5% [Highest]
    Ninth Plan (2054-2059 BS): 16.8% [Third Highest]
    Tenth Plan (2059-2064 BS): 24.0% [Second Highest]

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  7. Mr C.B,
    First of all, I appreciate your effort in this article. Lets try to have constuctive criticism of past development efforts. I am here as a devil’s advocate, taking the wrong position just to point out how supposedly right positions are not so right.
    -bookish : this is question of presentation than content. my advice- dont use seems like, appears, it can be concluded, intellectuals proclaim that etc and long sentences. these things confuse blog readers. ordinary folks dont know anything about economics.
    -libralization: caution is needed to implement it. i am not for protectionism/ subsidies but liberalization is not panacea. you cant liberalize and expect the country to be rich without industries/services. when france liberalized its market to let enter german products, france got CAP subventions. the question is know what is being achieved at what costs.
    -development: it was an addendum. Sen values democracy for its intrinsic value and substantive freedom.
    -agriculture: you look at inputs and me at outputs. 1.Nepal is net food importer from a food exporter decades back 2.Irrigation /hecter vis a vis benchmark India or China shows how much Nepal is lagging.
    Personally, I haven’t taken pain to go through annals of five year plan. I once overheard head of NPC saying anyways that five year plan was a wasteful activity… so we stopped in the middle of the last one. I am sure that all those figures were cooked within some arcane bureau of planning department whereas the real investment has been faltering. As an informed person of nepalese economy, you should know that the whole of development budget is made just to show to the donors. they make the budget, increase the administrative expenses, dont spend the development budget and transfer the unspent money to normal budget. basically, its an elaborated cheating system where govt spends money without accountability. but in a country, where the finance minister involves in corruption in policy making level viz. Dr Jyoti, everything can go wrong.

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  8. P.S.: you are right that most people think politics / politicians are panacea to avoid underdevelopment. Just look at the number of comments posted in each political discussion of this blog..

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  9. Mr. Santosh,

    I am all for constructive criticism. And I appreciate that there was someone to comment on this issue because everything is so political in Nepal. Everything is politics.

    First part, being ‘bookish’ was because the nature of article was as such. Since I was basing this article on academic works of professors, there was need to build some theoretical background to provide justification of Nepalese experiences. Secondly, economics cannot claim in totality that it is exactly this or that influencing variable as in scientific research and it is a normal practice to write ‘appears’ ‘it can be concluded’. Thirdly, since I am just a small fry, I cannot be that authoritative to assume I have exactly found the ’cause’. Fourthly, I do not want to commit academic fraud – quoting others without acknowledging.

    I am not advocating either liberalization or no liberalization in this article. Only fact I am stating is that our past liberalization effort has not delivered us desired results. Possible causes may include poor regulation design and inability to accord priority on part of our policymakers. I do not think that make be anti-liberalization or pro-liberalization.

    As for agriculture, only on the part of proposed budgetary allocation, it was given priority; however, implementation and achievement is a different ballgame. And I am not disputing that achievement has been poor. However, comparing with India or China may be bit impractical because of size and nature of economy differences (as they say comparing between uncomparables).

    It is true that from net exporter of agriculture produce in 1960s we have become net importer by 1980s.

    Yes, most of the statistics in Nepal is cooked up.

    It is also true that structural policies are driven by donors, which I have stated in the article.

    Transfer of development budget to regular budget is not possible because of a rule that does not allow the government to do that. Of course, backroom scheming may be possible but I am not aware of it.

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  10. You’re so awesome! I do not suppose I’ve read something like this before.
    So great to discover another person with original thoughts on this subject matter.
    Really.. thanks for starting this up. This site is something that is required on the internet, someone with a little originality!

    Like

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