The Kathmandu Post (Jan 23, 2011)
Oped»
No invisible hands here
Nepal is now at a historical juncture of exploring a new path for economic development and peace building. In addition to the political agenda, economic issues should get space to shape the path of long-awaited and elusive economic development in Nepal.
Even after more than three decades of state-led development efforts and more than two decades of market-based economic policies, Nepal is still at the bottom of the development ladder with widespread poverty and unemployment. The economic liberalisation process initiated from the mid-1980s pushed the country into a decade-long internal armed conflict in 1996, resulting in a fragile political system. With the initiation of the peace process in 2006 and the declaration of a republic in 2008, Nepal is now recuperating from the shock of internal conflict, and in search of not only a new political system, but also a new way of attaining economic development.
Nepal initiated state-led development in 1956. However, after facing a balance of payments (BOP) deficit for three consecutive years in the first half of the 1980s, Nepal adopted an economic liberalisation process by implementing Structural Adjustment Programme in the mid-1980s. Then it pursued the International Monetary Fund and the World Bank’s prescription based on the Washington Consensus. Economic liberalisation policies embraced include privatisation of state-owned enterprises, market-determined price system, trade liberalisation, financial sector liberalisation and fiscal consolidation.
Consequently, Nepal has become one of the most liberalised countries in South Asia. On the contrary, economic performance has been dismal with low economic growth and denigrated living standards. It can be claimed that the economic liberalisation process has eroded the industrialisation base and ignited deindustrialisation of the Nepali economy. While Nepali markets have been flooded with imported goods, the capacity to compete in the exports market has not been strengthened.
Despite the implementation of three structural adjustment programmes and one Poverty Reduction and Growth Facility (PRGF) programme, Nepal still ranks 193rd in the world, with a per capita GDP of US $470. To the surprise of many market proponents, in the middle of implementation of the economic liberalisation process, Nepal plunged into the internal armed conflict in 1996 fuelled by an army of the deprived and unemployed. Neo-liberalisation policies mainly focused on macroeconomic stability, bypassing employment generation and poverty alleviation under the false belief of a trickle down effect.
Nepal was at par with East Asian economies like South Korea, Malaysia, Singapore and Thailand in the 1960s. The development gap widened in subsequent years, thus falsifying
the notion of neo-classical convergence proposition. Nepal still faces problems of limited productive land base, a landlocked location, dismal industrialisation, a weak export base, low per capita GDP growth, and a slow transition from a subsistence agricultural economy. The share of agriculture in GDP is still 35 percent and provides employment for two-thirds of the population, but not enough food to feed the whole country.
More importantly, Nepal is one of the lowest per capita consumers of commercial energy—a very critical indicator of industrial and urban development. Nepal has been passing through unprecedented energy crises for the last few years, facing power outages of up to 12 hours every day. As a consequence of this and prolonged political transition, investment has been low resulting in stagnant economic growth. This has also compelled a massive exodus of youth for foreign employment. It is hard to imagine that industrialisation will bring economic growth and development amidst the acute energy crisis. This situation is partly the result of neo-liberal policies of more than the past two decades that minimised the role of government in infrastructure building with hopes that a market-led economy will work through invisible hands to bring market equilibrium.
The developmental experiment in Nepal, and many studies done elsewhere, confirm that market-based development strategies alone do not work in countries like Nepal. On the same note, Chang and Grabel (2004) have suggested three reasons why the Washington Consensus is not desirable. First, the economic policies associated with the neo-liberal agenda have failed to achieve their chief goals and the cost of this failure has done serious harm to the developing world. Second, historical and current evidence supports multiple routes to development. In reality, most of the policies used by successful countries run counter to the policies advocated by neo-liberal economists today. Third, in the face of such evidence, some of those most closely associated with the Washington Consensus (and with neo-liberal policies) have recently attempted to modify their positions.
In this context, it is now necessary to recognise Karl Polanyi’s view that institutions, governance and distribution matter. In the preliminary stage of development, the government should be instrumental in bringing the economy onto a path of development. The state can fail in many dimensions, but as Polanyi (1944) emphasised, it is the central economic actor.
We should ignore the ‘one size fits all’ notion of economic liberalisation policy. In reality, the appropriateness of any particular policy depends on specific national conditions, such as resource endowments, the scarcity of foreign exchange, proximity to key markets, social and political conditions, and so on. Therefore it has to be a genuine task of emerging economists, politicians and policy makers to come up with alternative ideas and to promote feasible alternative policies that already exist in order to enhance rapid economic development that is equitable, stable and sustainable. The poor living in developing countries like Nepal deserve concrete development strategies that can guarantee decent jobs and provide basic infrastructure in the 21st century, not only piles of glossy reports that describe their plight with colourful pictures.
Khanal is a PhD student at the University of Missouri, Kansas City and Shrestha is a PhD student at the New School for Social Research, New York City)
kalpana khanal Prakash Kumar Shrestha
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