Political Economy of Self-reliant Development: Theories and

Practices in Nepal

By
Dilli Raj Khanal, Ph.D1

Submitted to
The Central Department of Economics
Kirtipur
TU

May, 2016
Kathmandu

1
Dr. Khanal, former member of the National Planning Commission, takes special M. Phil.
Classes on Advance Macroeconomics, Central Department of Economics, T.U.
Table of Contents
Abstract...................................................................................................................................................3
1. Introduction.....................................................................................................................................4
1.1 General Background......................................................................................................................4
1.2 Research Questions.......................................................................................................................5
1.3 Objectives......................................................................................................................................5
1.4 Significance of the Study................................................................................................................5
1.5 Methodology.................................................................................................................................6
1.6 Structure of the Paper...................................................................................................................7
1.7 Limitations of the Paper.................................................................................................................7
2. Defining Self Reliant Development from Political Economy Perspectives.......................................7
3. A Critical Review of Development Theories and Their Practices from Self –Reliant Development
Perspectives.............................................................................................................................................9
3.1 Critical Review of Development Theories......................................................................................9
3.1.1 Linear Stages Growth/Modernization Theory...........................................................................10
3.1.2 Structural-Change Theory.........................................................................................................10
3.1.3 Marxists and Neo-Marxists Driven/Induced Dependency Theory............................................11
3.1.4 Development Theory of Neo-liberalism....................................................................................14
4. Important Lessons: A Need of Alternative Development Discourse Grounded on Successful
Country Experiences..........................................................................................................................23
5. Political Economy of Nepal’s Past Development Discourses (1960-2015) from Self-Reliant
Development perspectives................................................................................................................28
5.1 Period of Absolute Monarchy (1960-90)......................................................................................29
5.2 Democratic Period with Short Autocratic Regime (1990-2015)...................................................34
6.0 Concluding Section: Prospects and Challenges of Self –Reliant Development Discourse in Nepal
...........................................................................................................................................................49
References.........................................................................................................................................62
Abstract

Despite more than six decades of development endeavourers, Nepal’s external dependency has
amplified phenomenally overtime, more so in the recent years. More worryingly, inability to
manage the supplies of daily necessities even for few days after abrupt economic blockade by the
Southern neighbor has exposed the external vulnerability of the Nepalese economy markedly.
Now the pressure is building up on Nepal to explore the possibilities of enhancing self-reliant
development discourse more urgently and effectively. Noticeably, the new constitution
underscores on the need of such a development led economic prosperity in Nepal. In such
backgrounds, the paper following political economy approach, at first, clarifies how the term
self-reliant has been conceived by the paper in this age of globalization and financialization. It,
then, reviews critically the major development theories and their practices with focus on
contemporary dominant development theory of neo-liberalism and derives the important lessons
to be useful for the countries like Nepal. A critical review of development efforts of last fifty five
years (1960-2015) is one of the most important features of the paper in which major lapses and
shortcomings of both autocratic and democratic regime are discussed from the self-reliant
development angle. Finally, the paper based on the analysis of various aspects of prospects and
challenges concludes that self-reliant development led prosperity is quite promising in Nepal
amidst comparative advantages and competitive strengths in number of areas.
 1. Introduction
1.1 General Background

In the post second war period, various development theories have been developed and prescribed
for the poor developing countries. Depending on their own assessment on the underlying reasons
of vicious circle of poverty and underdevelopment in the poor countries, various alternative
development paths and means have been proposed or suggested (Szentes 2005). Although the
heart of the debate has largely been on the philosophy of development, development type and
accompanying role of the state and the market, a big departure in the development discourse took
place after the crisis in the early 1970s under the influence of neo-liberalism led market
fundamentalism principles. Attempts were made continuously to enhance the role of the market
and minimize or limit the role of the state in the economy. To expedite that process in the
developing countries, structural adjustment program was introduced in the 1980s. This was
followed by the enforcement of big bang liberalization and open up policy agenda under the
Washington Consensus in the mid 1990s. Together with formation of World Trade Organization
(WTO) in 1995, a process of globalization was almost completed. Again a big shift in the
discourse took place after the technology bubble led crisis in the US in 2000 and 2001 in which
financilization route was more aggressively pursued in the US and other capitalist countries with
similar policy adjustment pressures to the developing countries. However after the abrupt bigger
financial crisis and great recession in 2008 and subsequent adverse developments in the world
economy leading to deepening or looming more serious crisis , more forceful arguments on the
need of alternative development discourse are being advanced, more so in the context of
developing countries. Evidently along with neo-liberalism led globalization and financialization
development discourse, many poor developing countries like Nepal are facing bigger external
dependency led problems with wider spillover effects on the domestic economy despite the fact
that during the same period of many up and downs or severe crisis in the global economy some
countries have performed quite well

As is well known, Nepal has the planned development experience of almost six decades. Equally
noticeably, Nepal started market oriented reforms in the form of structural adjustment in the mid
1980s followed by intensive liberalization drive from the beginning of 1990s with the
expectation that it will lead to augment export led high growth and development similar to the
ones accomplished by the Southeast Asian and a few other countries. The irony is that in
addition to very low growth performance with stagnation in many sectors in the post
liberalization period added by very low level of domestic saving, the external dependency has
increased enormously resulting from, among others, increased import dependency even for
fulfilling the basic necessities despite more than 66 percent of the population engaged in the
agriculture sector. Nepal has reached in such a threshold that the trade deficit has become highly
unsustainable leading to very high external vulnerability (Khanal, 2014 and NRB, 2015). So
much so, the undeclared trade blockade by India immediately after the promulgation of new
Constitution violating all international treaties, norms and bilateral agreements and subsequent
effect showed that Nepal has no resilience capacity for even few days and cope with the trade
embargo led crisis2. Notwithstanding the constraints imposed by the landlockedness
2
A general assessment of the economy by the government due to trade blockade showed that
apart from severe humanitarian calamity, Nepal faces tremendous economic looses and bigger
accompanied by autocracy smashing the democracy or preventing its institutionalization for
long, decade long violent conflict and more recent long painful political transition, the reality is
that in comparison to many least developed countries of today Nepal possesses higher
development potentials as, for instance, resource endowments including water resources, bio-
diversity and comparative advantages in some important areas including tourism indicate. This
underscores on the need of identifying the major reasons for Nepal’s too much external
dependency led vulnerabilities and exploring the possibilities of enhancing alternative route of
self-reliant development.
1.2 Research Questions

a. To what extent the development theories are relevant from self-reliant development
perspectives and why some developing countries performed extremely well compared to
others?
b. Why Nepal dismally failed to enhance sustained self-reliant development despite more
than six decades of planned development? What are the political economy reasons for
this?
c. Is there a strong possibility of embarking on the path to self-reliant development more
effectively in Nepal in the era of globalization and financialization?
1.3 Objectives

The overall objective of the paper is to review various development theories and their practices
and derive lessons especially from the standpoint of exploring the possibilities and prospects of
pursuing the self-reliant development discourse more effectively in Nepal. The specific
objectives of the paper are as follows:

a. Define self-reliant development in the changing global context and then review the
development theories from the standpoint of self reliant development with particular
focus on the features of dominant neo-liberalism led development discourse,
b. Assess briefly the development strategies of some successful countries including a quick
review of recent literature in this area and derive lessons to be instructive to the
developing countries like Nepal,
c. Review the development discourses followed by Nepal during the period 1960 to 2015
and evaluate their outcomes from the point of view of self-reliant development,
d. Explore major development strategic options to be appropriate for enhancing self-reliance
development in Nepal taking broad developmental direction set by the new constitution
into account.
1.4 Significance of the Study

Along with frequent or looming deeper crisis in the global economy compounded by secular
stagnation, slowdown in productivity growth and enormous rise in the gap between haves and
have not’s under the dictate of the neo-liberalism led globalization and financialization, a global

opportunity cost with very adverse near to long term impact on the developmental front. See
government White Paper (MOF, 2015).
debate on the need and viability of alternative development paradigm has heightened in recent
years3. Very different development strategies pursued by the highly successful countries from the
one dictated globally today has additionally given ground for seeking the viable development
alternatives. The unprecedented rise in the external dependency led vulnerability in many
developing countries amidst very worrying phenomenon in the global economy has become a
matter of big concern today with growing realization on the need of exploring the possibilities of
advancing self-reliant development discourse. Nepal probably could be as one of the classic
cases in this respect in view of the economy now virtually surviving in the mercy of augmented
remittances inflows and other transfers amidst trade deficit reaching in the neighborhood of 32.5
percent of GDP in 2015. The thrust of the new constitution on the road to self –reliant
development has additionally underscored on the need of reversing the unsustainable
dependency syndrome, at the same time taking successful country experiences into special
account.

It is also worth mentioning that self-reliant development is often interpreted or defined

synonymously with the self-sufficiency development discourse which is misleading. At the same
time, apart from increased integration with regional and global economy, countries like Nepal
need external technology and resources in their drive toward higher growth and sustained
development. This necessitates the clarity on how we should perceive the concept of self-reliant
development in the changed environment.

More importantly, path to self-reliant development is closely linked to national and international
political economy factors since the economy today is largely embedded into the dominant global
system again influenced or supported, to a greater extent, by the internal dominant ruling classes
or elites. Therefore, changed political power structure determined to bring about change in the
rules of the game at the top as well as production relations at the base coupled with bold
measures to reshape the external economic and trade relations will be critical for bigger strategic
shift in the development discourse. This means that political economy approach is very crucial to
examine the prospect of self reliant development which is the main bases of analysis and
discussion in this paper.
1.5 Methodology

In the paper, qualitative and analytical descriptive approaches have been followed. The
discussion, therefore, is based on the critical review and findings of the national and international
studies, published and unpublished documents and secondary data sources.
1.6 Structure of the Paper

3
After a very critical view on too much emphasis on the role of the market without assessing the
market conditions at the ground level by Killick (1989), enormous body of literature has come
out recently in which in addition to pointing out the lapses inherent in the neo-liberalism led
development discourse, some alternative routes are also proposed in such research based
literature. Some of such literature includes Plant (2009), Piketty (2014), Rodrik (2015) and Korz
(2015) among others.
All together, there are six sections in the paper. After this introductory section, second section is
devoted to conceptualize and define the term self-reliant development. This is followed by a
brief review of the major development theories and their practices with additional focus on the
political economy reasons for the emergence and predominance of neo-liberalism led
development course in recent years in the section three. In the same section, the underlying
reasons for the great financial and economic crisis of 2008 and subsequent debates on the merits
of neo-liberalism led globalization and financialization amidst fragile recoveries or hovering of
another deeper crisis in the global economic system is discussed. The fourth section discusses on
the emerging views on the alternative development discourse taking experience of East Asian
countries and some others into special account. In the fifth section, a critical review of
development discourse and accompanying economic policy regime including performance of the
Nepalese economy particularly on the external front is reviewed and assessed following political
economy approach in order to delineate more realistically the underlying reasons for the
manifestation of unsustainable external dependency of the Nepalese economy. In the last section,
in the light of developmental routes envisaged by the New Constitution together with major
conclusions derived in the section three, some of the specific ways for embarking more
effectively on the path to self-reliant development are suggested.
1.7 Limitations of the Paper

The major limitation of the paper is that the discussion is based on secondary sources without
verification based on original research on different related issues. The suggestions on the
possibilities of marching toward self-reliant development are also constrained by similar
limitations. Above all, despite political economy approach demanding in-depth analysis on both
rules of the game as well as policy regime affecting production and distributional relations taking
international dimension into account, some generalized approach has been followed based on
earlier studies and observed trends.

2. Defining Self Reliant Development from Political Economy Perspectives

There is often confusion about the distinction between self sufficiency and self-reliance. Self-
sufficiency of a country can be defined as production of all the required goods and services fully
domestically without depending on imports. It is often called autarky. The self-reliance, on the
other hand, can be defined as a condition of a country in which internal demand gap of
domestically produced goods and services is fulfilled by corresponding foreign exchange
earnings through exports. This means that based on a country’s domestic resources and
competitive strength, a country may for instance produce excess paddy for exports so as to earn
foreign exchange for importing wheat which is either not produced domestically or produced less
than domestically required. The whole trading and payment system, thus, beyond comparative
trade theory arguments ensures that no external dependency of a country in the form of external
assistance or loan arises. These are simply elaboration of literal meanings.

Some wider and relatively comprehensive definition of self –reliance was made back in 1985 by
Galtung. He describes the basic rule of self-reliance as: produce what you need using your own
resources, internalizing the challenges this involves, growing with the challenges, neither giving
the most challenging task (positive externality) to somebody else on which you become
dependent or export negative externalities to somebody else to whom you do damage (who may
also become dependent on you). He further points out that nothing self-reliance is against trade
provided it takes place according to the following two rules: (a) carry on the exchange so that the
net balance of costs and benefits including externalities for the parties to the exchange is as equal
as possible (b) production should be carried out in such a way that the country is at least
tentatively self-sufficient and also produces basic necessities such as food, clothing, shelter and
energy etc (Galtung, 1985).

Some clarity on self-reliance development from individual’s perspective is found in Johnson

(2007). To justify self-reliant development he argues that ineffective development models mean
that real money is being granted, loaned, or invested without any real, sustainable return and
hence the lives of billions are lived out in misery and despair because social justice is not being
achieved and the talents and gifts of far too many lie fallow and undeveloped. He points out that
economic self-reliance (ESR) represents a different way of thinking about the processes and
outcomes of economic development. According to him ESR is an individual’s ability to garner
and hold economic resources in excess of their basic needs4.

In general, earlier literatures5 while arguing in favor of self reliant development point out that
rational economies or units (be it continental, regional, national, state, local, household,
individual, etc) would strive to depend on their own (internal resources) for sustenance and
growth and avoid excessive reliance on external resources. They outline that such a type of
development relies mainly on internal human and material resources of an economy or an
economic unit as opposed to development that relies heavily on “external” resources. The self
reliance development, thus, has very strong micro root as well which is often expressed in the
principles of self-help. The self-help approach focuses on the need of establishing and
strengthening people involved built in development system from the grass roots to utilize local
resources (land, water, labor etc) for fulfilling people’s requirements locally and uplifting their
living conditions. The focus on rural community and urban development in a self sustained way
added by stresses on self—sufficiency in some basic needs is also grounded on such a
development root.

Conceiving the essence of self-development-reliant on those lines, there is, however, a need of
additional thought particularly in the context of today’s dominant global economic system. As
such, production, exchange and distribution relations including economic structures are changing
rapidly along with fast integration of economies at both global and regional level amidst
intensification in globalization and financialization added by enormous proliferation of regional
free trade agreements (RFTAs) including European Union and two mega RFTAs. Free (or at
least limited restrictions) trade flows and capital movements are outcome of these. Today almost
80 percent of total global trade takes place through global supply chains which are primarily
owned and operated by the transnational companies. The annual flows of financial capital is
higher by many times compared to total global output which again is predominantly controlled
by the financial oligarchic.

On the other hand, poor countries like Nepal need foreign investment and technology transfer
awfully for harnessing development potentials. Today no one can think of autarky. Therefore,
4
See for such a line of reasoning www.What is Economic Self-Reliance.pdf. Paul C. Godfrey.
5
Review and elaborative discussion on self reliance development is found in Ojameruaye (2004).
we, under the predominant world economic system, are in the circuit of interdependent world.
But the real problem in the countries like ours is that, instead of interdependency, dependency
has aggravated in an unsustainable way with deepening externally driven or transmitted
vulnerabilities to the domestic economies alarmingly. But how to reverse that trend should be the
main focus of self-reliant development discourse. To the countries like Nepal this is a major
challenge which is not only liberalized but also integrated mainly with the single economy added
by landlessness and geographical constraints. This demands major restructuring of the economy
which again is associated with the political economy factors closely linked to the rules of the
game at the top and production and distribution relations at the base. Indeed, there are two way
causations. The economic power formed through particular production and distribution relations
changes socio-economic formation itself which again influences the rules of the game through
political forces at the helm in the states. In the present internationally dictated political economy
context, state and private sector relations influenced by or colluded with transnational
corporations, various multilateral and regional institutions together with bilateral relations play
critical role in shaping or changing the production, exchange, consumption and distribution
relations with ramifications on the structure and pattern of development of a less developed
country like Nepal. Unless these political economy factors are taken into account, self-reliant
development could be either rhetoric or zero sum game.

3. A Critical Review of Development Theories and Their Practices from Self

–Reliant Development Perspectives
3.1 Critical Review of Development Theories

When development economics emerged as one of the main disciplines of economics in the early
1950s, its main concern was to devise the ways through which the economies of a nation-state
could grow and expand (Szentes 2005). It was mainly concerned with identifying the sources of
growth and role of production factors in the growth process. The role of market vis-a-vis the
state and other institutions was also the subject of concern. In deed these concerns are at the heart
of classical and neoclassical development economics even today. Then labor surplus theory and
dualistic economy based development models as well as theories of structural changes became
popular during the late 1960s and 1970s. In parallel, more distinct radical development
economics challenging the capitalist mode of production and development was advanced
grounded on or under the influence of Marxist and Neo-Marxist principles from the early 1950s.
These theories popularized in the form of dependency theory viewed underdevelopment in terms
of international and domestic power relationships, institutional and structural economic rigidities
leading to widening of gap between developed and underdeveloped nations as well as privileged
class and downtrodden. These theories argued that both external and internal institutional and
political constraints were major barricade to desired economic development from a poor nation
and its people’s perspectives. The Neo-liberalism led development theory grounded primarily on
neo-classical beliefs gained ground in the early 1970s and is predominant since the 1980s. The
manifestation of globalization and financialization is the outcome of this. It refutes the arguments
of dependency theory by claiming that countries are not developed not due to exploitive external
and internal forces but due to too much government intervention and regulation in an economy.
Based on such logics, it by following laissez fair driven market fundamentalism, stresses on the
free market economy and openness as a precondition for the development of developing
countries. Below a critical review of major development theories from self-reliant development
perspectives is made:
3.1.1 Linear Stages Growth/Modernization Theory

Grounded primarily on the historical pattern of development in the developed countries, stages of
growth theory were developed in the 1950s and early 1960s. Mobilization of minimum threshold
of saving including foreign aid for augmenting investment was considered as a precondition for
higher growth in developing countries. The Keynesian theory and experience of the Marshall
Plan also had influence on such a stages of growth theory.

The stages of growth theory developed by Rostow (1960) and often called a modernization
theory became popular up to the early 1960s in the developing countries. It advocates on the
need of huge investment through mobilization of domestic and foreign saving for the transition
from underdevelopment to development and accelerated growth. However, it by ignoring the
major hurdles emanating from institutional and structural constraints undermines the likely
adverse effect of increased external dependency on the domestic economies of the poor countries
including impediments to the trickle downing of benefits. At a more fundamental level, the
stages theory failed to take into account the crucial fact that contemporary developing nations are
part of an integrated and complex international system in which even the best and most
intelligent development strategies can be nullified by external forces beyond the countries’
control. Due to such reasons its popularity gradually eroded within short period despite the fact
that in development planning including quicker growth, saving and investment calculations the
Harrod- Domar steady growth model is still widely used.
3.1.2 Structural-Change Theory

Structural-change theory focuses on the mechanism by which underdeveloped economies could

transform their domestic subsistence economies into modern, urbanized, and industrially diverse
manufacturing and service economy. It employs the neoclassical price and resource allocation
principles to describe econometrically the transformation process through which such a structural
change could take place. Lewis’s (1954) well-known two-sector surplus labor theory and its
extension by Fei and Ranis (1964) as well as Chenery and Syrquin’s (1975) empirical
verification based on long time series data on the patterns of development are its major
foundations.

The Lewis two-sector model became the general theory of development in surplus-labor
countries during most of the 1960s and early 1970s. It assumes that in such a country, surplus
labor from the agriculture can be transferred to a high-productivity modern urban industrial
sector without any loss of output there. On the postulation of constant wages in the urban
industrial sector and reinvestment of profits by the capitalists, a high rate of industrial investment
and capital accumulation in the modern sector is assumed by the model. However, one of its
problems is that it fails to understand that if capitalist profits are reinvested in more sophisticated
labor saving capital equipment than the impact could be very different from what is stated by the
model. Similarly, the assumption of a competitive modern-sector labor market guaranteeing the
continued existence of constant real urban wages up to the point where the supply of rural
surplus labor is exhausted is equally questionable. It also somehow undermines the need of intra-
sectoral changes in the agriculture sector itself.

Grounded on the Lewis model, the structural change theory based on the empirical analysis of
some countries on the pattern of development argues that through certain sequential process
replacement of traditional agricultural by an industrial economy is possible (Chenery and
Syrquin, 1975). It identifies several characteristic features of the development process such as a
shift from agricultural to industrial production, a steady accumulation of physical and human
capital, a change in consumer demands from food and basic necessities to diverse manufactured
goods and services and growth of cities and urban industries etc.

Although many of the assumptions including the assumption of foreign aid being additive to the
domestic saving and investment have been questionable depending on the characters of a
particular state in the developing countries, successful development experience of many newly
industrializing countries passing through similar structural changes on the one hand and
structural rigidity affecting productivity and growth in many countries on the other has once
again enhanced the importance of such a theory6.

3.1.3 Marxists and Neo-Marxists Driven/Induced Dependency Theory

Although Marx did not separately and specifically outlined the theory of development in his
writings, he by advancing more scientific political economy approach to examine the modes of
production in various stages tried to prove that due to inherent contradictions and accompanying
deepened crisis over time the capitalism is bound to collapse. He advanced the notion that
human labor was the key source of creating surpluses by the capitalists. He was the first political
economist to introduce a more holistic analysis of economic system in which he showed that
how the circuit of capital accumulation and reproduction takes place in the capitalist system.
Based on such a scientific analysis, Marx challenged the theories which grounded on self-
equilibrating economic system strengthening harmonious societal relations were claiming that
producing of efficient and fair outcomes were possible under the capitalist system. Rather he
showed that such a system would need accumulation of capital constantly as a result of falling
rate of profit due to over production and under consumption emanating from exploitation of
workers with a phenomenon of both endemic exploitation and crisis. He argued that such a trend
was both exploitative as well as explosive because it involved those who own the means of
production – the bourgeoisie – extracting surplus from those who only own their labor – the
proletariat. He concluded that under such circumstances, the exploitative capitalist mode of
production detrimental to the development of productive forces will be overthrown through
revolution and then it will be replaced by socialist system to create exploitation free society.

Despite Marx’s predictions being the subject of debate and controversy, a number of
development theories inspired directly by Marx, including ones emphasizing the need to follow a
non-capitalist path to development and others which draw heavily on Lenin’s analysis of
imperialism have been developed and popularized. The first is dependency theory which was

6
The role of structural changes and economic transformation in the context of developing
countries amidst globalization has been thoroughly discussed in Rodrik, and McMilllan (2011).
developed by Prebisch (1950) and later advanced by Frank (1967), popularly known as the
theory of development of underdevelopment7.

Dependency generally is defined as an explanation of the economic development of a state in

terms of the external influences--political, economic, and cultural--on national development
policies8. From self-reliant development perspectives, the dependency theory made an epoch
making contribution in the theory of economic development.

Disagreeing with the modernization or steady growth theory on both diagnosis of problems and
ways toward rapid development, Dependency Theory which is often called a theory of centre and
periphery was first advanced by Raul Prebisch 9 in the 1950s. He came to the conclusion that,
advanced industrialized country’s economic growth instead of contributing to the growth of
poorer countries was creating serious economic problems to these countries. Prebisch's initial
explanation for the phenomenon was very straightforward: poor countries exported primary
commodities to the rich countries that then manufactured products out of those commodities and
sold them back to the poorer countries. The value added by manufacturing a usable product
always cost more than the primary products used to create those products. Therefore, poorer
countries would never be earning enough from their export earnings to pay for their imports.
More comprehensive explanation on the dependency is given by Santos (1971). According to
him “Dependency is...an historical condition which shapes a certain structure of the world
economy such that it favors some countries to the detriment of others and limits the development
possibilities of the subordinate economics...a situation in which the economy of a certain group
of countries is conditioned by the development and expansion of another economy, to which
their own is subjected”. Frank who advanced the theory of development and underdevelopment
is regarded to be one of the architectures of more advanced dependency theory. Frank’s model
shows that how the traditional sector is linked to the modern one but not necessarily in ways that
enable its development, rather in ways that ensure its ongoing underdevelopment (Frank, 1967).
He posited that there was a chain of exploitation that ran from: peasants being exploited by local
landowners – who extracted surplus by not paying peasants the real value of the commodities
they produced - from land owners to local merchants, to regional elites, national elites and
eventually Western capitalists.

Neo-Marxists built both on Marxist insights into the nature of capitalist exploitation and Lenin
and other’s analysis of imperialism show that how the imperial system had delayed or defused
capitalist crises in Europe. One of the earliest neo-Marxists was Paul Baran (1957) and argued
that while in the First World capitalist economic surplus is re-invested and creates growth and
dynamism, in the Third World, surplus ends up being transferred to the First World by
multinational corporations or used for conspicuous consumption by the local elites. It was Baran
along with Paul Sweezy who in 1968 coined the term ‘monopoly capitalism’ arguing that the
world economy was dominated by large multinational corporations who could exploit Third
7
Prebisch’s views/suggestions are regarded to be more liberal leanings where as Frank’s views
and recommendations are found to be more radical grounded on Marxian line despite larger
differences with Neo-Marxists in the interpretation on the reason of crisis in developing
countries and means to address them.
8
See Sunkel (1969)
9
For details see Prebisch (1950).
World countries (Baran and Sweezy 1968). They argued that the level of capitalist penetration of
the developing world was creating a ‘dependent capitalism’, resulting in domestic production
being undermined by competition from imported products and economic surplus being
transferred to the West. Then, according to them, a ‘comprador’ class is developed – a local
business elite involved in international trade not domestic production, whose interests largely
coincides with that of multinational corporations and Western countries. Their ultimate analysis
is that the product of the comprador class and Western capitalist interests is external relations
based on economic dependency, which, in turn, helps to structure domestic class relations
accordingly.

Taken together, following main features is found in the dependency theory:

1. Underdevelopment is a condition fundamentally different from un-development. The latter

term simply refers to a condition in which resources are not being used. Underdevelopment
refers to a situation in which resources are being actively used, but used in a way which benefits
dominant states and not the poorer states in which the resources are found.
2. The distinction between underdevelopment and un-development places the poorer countries of
the world in a profoundly different historical context. They are poor because they were
coercively integrated into the system in which they were only as producers of raw materials or
repositories of cheap labor, and were denied the opportunity to market their resources that could
compete with dominant states.
3. The diversion of resources over time is maintained not only by the power of dominant states,
but also through the power of elites in the dependent states. Dependency theorists argue that
these elites maintain a dependent relationship with dominant states because their own private
interests coincide with the interests of the dominant states. These elites are typically trained in
the dominant states and share similar values and culture with the elites in dominant states.
Consequently different internal structures each with a specific type of behavior are created and
strengthened to be detrimental to overcome underdevelopment in the developing countries and
enhance self-reliant development.

The proponents of dependency theory place more emphasis on international power imbalances
and on needed fundamental economic, political, and institutional reforms, both domestic and
worldwide. Unlike radical Neo-Marxists calling for the outright expropriation of privately owned
assets to eradicate poverty, expand employment opportunities, lessen income inequalities, and
raise the levels of living of the masses, most dependency theorist underline on the need of
alternative resource use and suggest that poor countries should embark on the path to import
substitution development strategy with priority on rapid industrialization through protective
economic system under the proactive role of the state. The overall strategy of the dependency
theorist was to weaken the grip of the global system with trade barriers, controls on multi‐
nationals, and the formation of regional trading areas. To that end, creation of national
development goals and following an independent pattern of development with the key role of the
state was suggested to the poor countries. The main focus was on self‐reliance through the
implementation of some of the important socialistic strategies10.

10
As is well known, some radical Neo-Marxists including Baran and Sweezy advocate on the
need of revolutionary changes in the capitalist system.
A quick look at various dimensions of the dependency theory shows that they have some major
weaknesses. First, despite offering an appealing explanation on the reasons of underdeveloped,
they offer little formal or informal explanation on how countries should initiate and sustain
development. Second, the actual economic experience of LDCs shows that revolutionary
campaigns of industrial nationalization and state-run production dismally failed in many
countries. At the opposite extreme, many Southeast economies emphasizing on export led
growth succeeded markedly and were able to escape to a greater extent from the problem of
periphery as highlighted by the dependency theory. Some of the specific suggestions are also
problematic. The internal markets of the poor countries are not large enough to support the
economies of scale to compete with the richer countries for keeping their prices relatively low.
Similarly, the political will and capacity of the poor countries to augment rapidly a
transformation from primary products producers to final producers given so many problems from
resources, organizational, managerial, skill enhancement, entrepreneurship, business skill to
technological advancement and marketing is lacking in the poor countries. Problems are also
encountered in preventing the selling of primary products abroad. More importantly, as the
experience indicates, a high level of protection on the one hand and very high rebates,
concessions and subsidies selectively on the other hand besides institutionalizing rent seeking
and corruption practices, augments inefficiency in resource allocation and uses and thereby
raises distortions and anomalies leading to retardation of development in many fronts including
mounting problems of sustaining macroeconomic balances and maintaining economic stability.

Nonetheless, one of the biggest messages of the dependency theory from developing country’s
perspective is that unless protracted dominant global capitalist system strengthened through
increased nexus with ruling elites of dominated states are checked and reversed, it will be almost
impossible to overcome from the aggravated adverse structural conditions contributing to
deepening of dependency and underdevelopment of the poor countries. Notwithstanding many
shortcomings, it could be considered highly useful and relevant in terms of both diagnosing the
root of the contemporary development problems and exploring some of the suitable options.

3.1.4 Development Theory of Neo-liberalism

Along with breakdown of Keynesianism in the early 1970s after its failures to cope with
stagflation in the developed capitalist countries along with simultaneous, among others,
aggravated balance of payments and debt problems in the developing countries, alternative
policies on the neoclassical line were brought to the forefront. First, the monetary policy over
fiscal policy was revived and employed in the developed capitalist countries to address the
problem of economic recession in the line of monetarism developed by Milton Friedman.
Rational expectations hypothesis pointing out that people by adjusting their behavior after
foreseeing the direction of government policies would nullify the government changed policy
effect also created ground for the revival of the neo-classical policy prescriptions. By the mid-
1960s, series of literature came up and pointed out that the negative impact of many country’s
incentives and price structures, exchange rate policies and protectionism in general were
detrimental to the overall ‘welfare’ of the economy (Rapley 2002). For instance, a study by Ian
Little, Tibor Scitovsky and Maurice Scott (1970) based on the experience of seven developing
countries in the postwar period came up with the conclusion that the overall impact of import
substitution industrialization (ISI) was negative. A further boost to the neoliberal theory came
from the writings of Krueger (1974), Tullock, (1980) and Bhagwati (1982). They showed that
under state protected economic regime how rent seeking or “direct unproductive profit-seeking
activities” are flourished with very adverse economy-wide effect. Their arguments created
additional strong ground to the trade liberalization. Thus, by the 1980s, new development
orthodoxy emerged in the development economics, which is generally labeled as neo-
liberalism11.

Since then, under the dictate and influence of or in collusion with dominant global power,
various policies and programs rooted in neo-liberalism have been implemented or adapted by the
developing countries. The structural adjustment program, highly liberal agenda under
Washington Consensus, Poverty Reduction Strategy Papers (PRSPs) and recent austerity and
fiscal consolidation led structural reforms have been implemented broadly in a sequential manner
and have been instrumental to bring the developing countries within the orbit of intensified
globalization and financialization system. The collapse of the fixed exchange rate regime in 1971
after unilateral defiance of the Bretton Woods Agreement of 1944 by the US and followed by the
implementation of floating exchange rate system in 1973 additionally contributed to push neo-
liberal agenda globally. Interestingly, if a particular time or period leading to further escalation in
such a policy discourse is narrowly looked into, a close link with the emergence or deepening of
crisis in the global economy in general and western capitalist countries in particular is found12.

As well known, the central argument of the neo-liberalism which is grounded on neoclassical
reasoning is that underdevelopment results from poor resource allocation due to incorrect pricing
policies and too much state interventions. Contrary to the claims of the dependence theorists,
they argue that the third world is under-developed not because of the predatory activities of the
developed countries and the international agencies that they control but because of the state
interventions leading to corruption, inefficiency, lack of incentives so on and so forth. Based on
such reasoning, they emphasize on the need of promoting free markets as per laissez-faire
economic principles to guide resource allocation decisions, enhance productivity and stimulate
economic development.

The Structural Adjustment Program (SAP) implemented in the mid-1980s was in the aftermath
of crisis in the Western Capitalist countries along with or followed by the crisis in many
developing countries. These countries were particularly confronting with the problem of rising
debt, increased inflationary pressures, BOP crisis and bourgeoning inefficiency and distortions in
the public sector13. Under the SAP some strong conditions linked to liberalizing the economy
and downsizing the role of the states and the governments were included. Privatization,
11
Neo-liberalism is often referred as specific form (market fundamentalism), specific class
relation (hegemony of capital over labor), specific process of capital accumulation (using money
to make more money), specific configuration of capitalism (liberalism with new configuration)
and specific phase of capitalist development (www.Political economy of global crisis and neo-
liberalism Juego and Schmidt APISA PaperFinal.pdf).
12
For detailed discussion on the development of neo-liberalism see Killick (1989) and also see
Levitt (2006) from developmental perspectives. For some historical account of underlying
reasons to push neo-liberalism led policies more pervasively overtime amidst deepening global
crisis see Beams (2008), Siddiqui (2012), Khanal (2014) and Korz (2014 and 2015) among
others.
deregulation and market oriented policy reforms added by minimization of the state role through
abolition of subsidies, administered prices and downsizing the government were major
components with topmost priority on economic stabilization. As an offshoot, IMF launched
Enhanced Structural Adjustment Facility (ESAF) in the early 1990s with more draconian
conditions after the termination of the SAP. With continued crisis in the capitalist countries
along with fear of deeper crisis in the Latin American countries, more aggressive and big bang
liberalization and open up policy agenda under the banner of Washington Consensus 14 were
brought out by the World Bank and the IMF jointly in 1995. The establishment of WTO in the
beginning of 1995 together with all the above agenda, policies and programs implemented in
sequence enabled to make the globalization process almost complete. As studies indicate, in a
short period, most of the developing countries eliminated quantitative restrictions on imports,
lowered tariff barriers, and reduced the dispersion of tariff rates (Rodrik 2004).

However, along with the implementation of such conditional programs homogeneously

worldwide without any reference to political, institutional and structural conditions in a
particular country, poverty worsened further in the developing countries besides the rise in debt
and external payment problems. The widening gap between the have and have-nots together
with rising debt and external dependency led to antagonize the toiling masses worldwide. The
multilateral institutions like the World Bank, IMF and the WTO faced backlash globally. In
such backgrounds, the Poverty Reduction Strategy Paper (PRSP) was evolved by the World
Bank and the IMF in the late 1990s. The paper emphasized on the need of country ownership
while preparing PRSP by the authorities in the developing countries. Thus unlike the SAP
period in which only central bank and Ministry of Finance were involved in the negotiation
process, an attempt to broaden the involvement of various stakeholders in the PRSP
implementing countries was made aimed at widening of support base for the program as well.
Likewise, unlike during the SAP period, apparently its focus was on poverty reduction, social
sector development and improved governance. It should also be added that this was prepared
after the financial crisis of East Asia in 1997 in which institutional failures including weak
regulatory mechanism in the banking system, among others, were said to be the major
shortcomings15. Under the influence of North’s (1990) emphasis on the rules of the game

13
Unlike the generalized view, some qualification in this respect may be desirable. The
inefficiencies and distortions were rampant in those economies where in the name of import
substitution or protectionism the governments were primarily engaged in institutionalizing the
rent seeking practices.
14
This has broad range of policies designed for developing countries to implement in a way that
could ensure not only expedition of internal deregulation but also to see that open up policies are
augmented through the means of competitive exchange rate, liberalization of inward foreign
direct investment and property right policies. It included ten agenda viz, i) fiscal discipline, ii)
reorienting of public expenditure priorities, iii) tax reform, iv) liberalizing interest rates, v) a
competitive exchange rate, vi) trade liberalization, vii) liberalization of inward foreign direct
investment, viii) privatization, ix) deregulation, and x) property rights.

For detailed analysis on the underlying reasons see www. On set of fin crisis in Eat Asia j
15

Sach.pdf.
added by consideration to the factors responsible to the East Asian crisis, the emphasis was
given on the institutional and governance aspects apart from priority to the poverty reduction
and social development as pointed out above. However, despite claims of a significant
departure from the past, critical review of various components of the prescribed agenda showed
that there was no fundamental departure from the kind of policy advice was given through the
“Washington Consensus” (UNCTAD, 2002). Moreover, some scholars went one step further
and called it an Augmented Washington Consensus16 (Rodrik, 2004) as it stressed on more
flexible labor market, further liberalization of capital account, more flexible exchange rate
regime and independency to the central banks. Therefore, unlike the claims, the design and
intension of PRSP was also to intensify a process of integrating the developing economies into
the dominant globalized system further despite the fact that due to the reasons pointed out
above there were some moves to appease or pacify the growing resentments worldwide through
some focuses on poverty reduction and domestic ownership of policies and programs.

The bigger crisis of 2000 and 2001 in the US, indeed, brought the turning points in the global
economic system as the major thrust shifted from trade to more aggressive financialization route
of globalization despite the fact that with steady decline in the mighty industrial power leading to
the decline in the rate of profit markedly, the US had embarked on the path to financialization
since the 1970s itself as an alternative route to quicker higher profit which, needless to add, is
indispensible for the survival and thriving of the capitalist system. By the 1980s, a new mode of
production and profits had emerged in which profits were made through the appropriation, by
financial methods, of already created wealth. The loose monetary policy of the US under Alan
Greenspan was designed to facilitate that route which encouraged technology-stock bubble in the
late 1990s.

As is clear, under the financialization route to capitalism (i.e. financial capitalism), financial
flows and transactions in the form of hedge, speculative and Ponzi financing play decisive role in
the economic system as pointed out long time by Minsky (1986). It is also worth noting that the
introduction of a floating dollar regime in 1973 after the collapse of dollar as an international
reserve currency in 1971 contributed greatly to augment financial transaction that additionally
contributed to the instability in the trade, finance and payment system worldwide by encouraging
hoarding, manipulation and currency swaps for quicker profits. As an offshoot, the growth of
derivatives was even more phenomenal. All these in combine had contributed to the formation of
technology-stock bubble by the late 1990s.

Again with the collapse of technology bubble, attempts were made in the US to counter a
possible long recession by cutting the prime rate to a 45 year low of one percent in June 2003
and kept it there for over a year. This led to generate another bubble-in real estate. How such a
course led to rapid increase in financialization can be understood by some examples. In 1980,
financial firms in US accounted for about 5 percent of total corporate profits. By 2006 this had
16
Under the PRSP the ten conditions include 1) corporate governance, 2) anti-corruption , 3)
flexible labor markets, 4) adherence to WTO disciplines, 5) adherence to international financial
codes and standards, 6) prudent capital account opening, 7) non-intermediate exchange rate
regimes, 8) independent central bank/inflation targeting, 9) social safety nets, and 10) targeted
poverty reduction. Thus, no changes in the policies laid down in the Washington Consensus are
found.
risen to around 40 percent. On a global scale, financial assets in 1980 were roughly equal in
value to world gross domestic product. Twenty-five years later they constituted 350 percent of
global GDP. In parallel, a process of financialization and securitization magnified with very low
sub-prime interest rate policy adopted to counter the recession of 2000 and 2001. In 1995 the
dollar value of asset backed security stood at $ 108 billion. In 2006 it reached $ 1.07 trillion
(Beams, 2008 and Bello, 2008).

More specifically, three developments, interacting with one another, gave rise to three trends that
were unsustainable over the long run. First, both household and financial sector debt relative to
GDP rose from 1979 to 2007, with the former ratio doubling while the latter rose almost six-fold
by the eve of the crisis. The rapid growth in household debt resulted from household borrowing
amidst very low interest rate to support consumer spending. Second, so-called "toxic" financial
assets spread throughout the financial system. These included subprime and other
unconventional mortage-backed securities, collateralized debt obligations, and credit default
swaps. They were toxic in that, far from reducing risk as their promoters claimed, these assets
had values that could be sustained only if the housing bubble inflated forever. The third long-
term trend, which often is not widely noticed, was the growing excess productive capacity of the
US economy (Kotz, 2014 and 2015).

Consequently, two types of bubbles formed and escalated in the US economy —a debt bubble
among households, certain sectors of industry that engaged in leveraged buy-out, and financial
institutions that actively used derivatives to leverage their exposure and an asset bubble in
equities, securities and property. This despite stagnating income and wages in the real sector
enabled households to rack up consumption to the highest level at 72 per cent of GDP prior to
the crisis. Hence, the structural trend towards falling share of wages and under-consumption was
transformed into over-consumption by the ordinary household (relative to their income) and
over-investment by the rich through a financial system that recycled the excess savings of the
rich to ordinary households and encouraged excessive risk-taking through innovative financial
engineering. In other words, with investment in industry and agriculture yielding either no or low
profits owing, among others, to overcapacity, large amounts of surplus funds were circulated and
invested and reinvested in the financial sector. The result was an increased bifurcation between a
hyperactive financial economy and a stagnant real economy. The problem with investing in
financial sector operations is that it is tantamount to squeezing value out of already created value.
It may create profit but it doesn't create new value. Because profit is not based on value that is
created, investment operations become very volatile and the prices of stocks etc can depart very
radically from their real value. The phenomenal rise in asset prices far beyond any credible value
fosters financial bubbles. The real estate led bubble had its roots on trillions of dubious
transactions with big backlash and enormous devastating impact on the global financial system
leading to great financial crisis in 2008 (Bello, 2008).

As is well known, the huge stimulus packages and bank bailout programs relying primarily on
excessive deficit financing were implemented to cope with and overcome from great financial
crisis turned into great recession (UNDPRC, 2009 and UNDESA, 2010) and hence both in terms
of route and accompanying means there was some jolt to the financial capital dictated global
economic system. But it is interesting to note that in order not to jeopardize the supremacy and
power of the financial capital, fiscal stimulus were halted even before the full recovery or revival
of the economies by the US, Europe and many other countries. Instead, polices of quantitative
easing17 were implemented in the US, Japan and many other countries with added threat of what
some economists call it secular stagnation18. At the same time, in countries such as Greece and
other peripheral European countries facing severity of debt problem including economic
recession, harsh austerity led structural reforms with focus on massive government expenditure
cuts and labor market reforms were forced which are still being continued in many countries. In
general the policy of fiscal consolidation and more accommodative monetary policy in the line
discussed above are encouraged today guided by the aim of boosting market driven financial
investment in the context of developing countries as well. More broadly, the purpose through
whatever routes has been to continue and enhance the predominant role of the financial capital in
the global economic system and play down or prevent even the alternative fiscal role which
demands some proactive role of the state in the line with regulated capitalism advanced by
Keynes and practiced before the early 1970s. This is being done despite continued fragile
recoveries, looming crisis and threat of even more greater crisis than that of 2008.

The global and country specific economic outlooks of the post 2008 period show that the global
economy is facing severe problems in different fronts. The latest global economic prospects
assessed by the World Bank also corroborate this. It, by indicating a disappointing decelerated
growth performance of particularly the emerging and developing economies, points out a
substantial downside risks, including a disorderly slowdown in major emerging market
economies, financial market turmoil due to sudden shifts in borrowing costs amid deteriorating
fundamentals, lingering vulnerabilities and heightened geopolitical tensions (World Bank, 2016).
The UN October 2015 report on global economic outlook identifies the problems more candidly.
It says that after more than seven years of the global financial crisis, the global growth prospects
face considerable headwinds, both cyclical and structural in nature, emanating from declining
trade flows, stagnating investment, diminishing productivity growth, persisting higher
unemployment and underemployment amidst ultra loose monetary conditions disconnecting the
finance and real sector activities with added threat of realizing the 2030 Sustainable
Development Agenda which underscores on the need of economic growth – sustained, inclusive
and sustainable – in generating full and productive employment and decent work for all and
delivering sustainable development worldwide (UNDESA, 2015). As the reports point out, high
volatility in financial flows led externals shocks together with weakening internal economic
capacity in a situation of large interest rate differentials between developed and developing
countries, exchange rate instability, reversal in investment flows, protection induced trade
barriers and unfavorable terms of trade etc are fuelling crisis in many developing countries.
Therefore, despite performance of the US economy relatively better more recently with

17
Amidst interest rates pushed to almost zero, central banks need to adopt different tactics - such
as pumping money directly into the economy. This process is known as quantitative easing or
QE. The central bank buys assets, usually government bonds, with money it has "printed" - or
created electronically these days. Although QE has already been stopped by the US, other
countries and most noticeably Japan are continuing.

The term secular stagnation was first used in 2013. What it is and how to address it is found in
18

Teulings and Baldwin (2014).

contribution to pivot or rescue the global economy to some extent, the problems if looked from
broader political economy perspectives they indicate the threat of deeper and more devastating
crisis19. The fundamental problem is that the real problems of 2008 and post 2008 crisis are often
diluted or concealed due to the ideological biases or to prevent any risk of losing grip and control
by those who are dictating the terms under which the global economic system is operating.

Generally, the focus of the debate linked to the roots of crisis of 2008 is confined to monetary
glut to a greater extent and saving glut to some extent with corresponding emphasis on the role
of the monetary policy vis- a- vis fiscal policy. The Keynesians point out that the major problem
was saving glut which according to them emanated from the global trade and current account
imbalances with big foreign exchange reserves in China and other Asian countries and huge
current account deficit in the US. The neo-liberals point out that monetary glut was the principle
reason which emanated from the interaction between the financial bubble and the cheap money
and loose monetary policies. Notwithstanding these, as indicated by many studies backed by
evidences, the roots of the problem lie in the systemic and structural conditions in the present
form of dominant global economic system which have manifested in the form of widening
imbalances between the financial sector and the real economy and unprecedented rise in the
income and wealth gap between the rich and the poor resulting from the concentration of
financial institutions toward speculative and highly risky activities with formation of large asset
bubbles and widening the gap between the profits and wages amidst stagnation in the real sector
(Mah-Hui and Ee, 2011, Piketty, 2014 and Kotz, 2014 and 2015). Moreover, Stiglitz20
terminating austerity as the politics of stupidity points out that there is likelihood of loose
monetary policies restoring global prosperity nil.

The Oxfam study (2014) more emphatically points out that the enormous rise in income and
wealth inequality globally has mainly resulted from the political capture of the privileged
wealthy people at both global and national level. It says that the massive concentration of
economic resources in the hands of fewer people presents a significant threat to inclusive
political and economic systems and warns of heightening social tensions and increasing the risk
of societal breakdown21. The compounded problem of political capture is that many important

19
The beginning of 2016 shows the likelihood of more turmoil in the financial market in the
coming days due to the massive selloffs resulting from the fears of further slowdown in the
Chinese economy added by plunging of oil and other commodity prices. With an added fear of
Brazil and Russia going into deep recessions along with slowdown in other emerging market
economies under the impact of falling commodity prices and rising debt, the volatility in the
financial market is feared to be intensified with very adverse effect to the global economy. Some
deceleration in the US economy which was showing some improved growth performance for
some time and was considered to be again a locomotive of the global economy has started
slowing down again as recent industrial output growth and employment figures indicate amidst
continued dampening spillover effect of austerities centric structural reforms in many countries.
20
See http://www.project-syndicate.org/commentary/politics-of-economic-stupidity-by-joseph-
e--stiglitz-2015-01-20.
21
Along with services sector gradually overtaking the predominance in most of the developing
economies added by further informalization in the labor market amidst more than 80 percent of
decisions with very long term impact on a country’s polity, economy and people are made
outside the democratic rules and processes. Greece is the latest classic example of this (Öncü,
2015). One interrelated interesting and paradoxical aspect is that when aid or bailout recipient
states and governments are obligated to implement the stiff conditions, the issue of excessive
state or government intervention hardly comes to the debate and discussion.

The question of political capture is very much associated with the political system of a country
and likely collusion of ruling elites with the dominant global and other external forces to a
greater extent under the present globalized system. Truly, democracy is regarded to be effective
for the more efficient operation of market (World Bank, 2002) as it is assumed that higher levels
of information help to find out better preferences and thereby introduce better polices.
Democracy is also supposed to help rapid institutional change towards greater efficiency,
freedom and property rights which are seen as crucial for economic development (North, 1990
and Siddiqui, 2012). Therefore, popular participation and political pluralism including free press
is recognized to be beneficial in tackling the developmental problems. But in a society where the
rules of the game is captured by privileged and the means of production is highly uneven or
monopolized by a few, liberal reforms from the top may be less helpful to strengthen the genuine
democracy and ensure distributional gains by the common people from the growth and
development outcomes22. In this respect, two important presumptions of neo-liberalism led
development orthodoxy are worth mentioning.

One of the virtues of neo-liberalism is that it assumes institutions, both economic and political,
as given and hence it does not foresee any obstruction by the given political and economic
institutions in the outcomes of the policies. From the same token, both historical and
contemporary societal factors and other initial conditions perpetuating inequality, exclusion and
more broadly the underdevelopment are overlooked on the assumption that consideration of the
technical type factors are sufficient in the efficient working of an economy 23. It should be
recalled that the emphasis on the role of institutions is often driven by the objective of property
rights and economic freedom rather than by the objective of required sweeping reforms in state,
political, economic and social institutions.

It is worth noting that in our societies the interplay of political, economic, and socio-cultural
factors shapes the institutions which in turn influences policy decisions that determine benefits or
opportunities to various section of society. The predominant political and social structure leads to
aggravate discriminations in economic opportunities which reinforce unequal political power.
The unequal distribution of power between the rich and the poor— between dominant and
subordinate groups— helps the rich maintain or enhance control over resources. Unequal
distributions of control over resources and political influence perpetuate institutions to protect

global trade carried out through supply chains of the transnational corporations, both real wage
decline and displacement of unskilled workers have been growing phenomenon leading to
fueling of income equality and depressed demand globally.
22
Flourishing of crony capitalism in many developing economies has been a new challenge
which is the outcome of close nexus between the ruling elites and the unethical greedy business
people involved in taking advantages of policies through different means. For this, see Ghosh ( ).
23
For detailed discussion see Killick (1989), Khanal et al (2005), Beams (2008) and Khanal
(2014).
the interests of the most powerful to the detriment of economic rights of downtrodden. Many
studies indicate that inequality perpetuated due to political, economic, social or cultural
discriminations affect the aggregate dynamics of growth and development 24. This simply means
that the neo-liberal policies ignore the internal power and social relations as well in addition to
downplaying the adverse effect of external relations as already pointed out above.

On the other hand, one of the important ingredients of the neo-liberalism led policies is that for
its working certain conditions like perfect competition and Pareto optimality are fulfilled. This
means, for prefect competition, buyers and sellers should not be in a position to influence prices
for which perfect information about alternatives should also be available. Similarly, complete
freedom of entry and exit including the absence of scale economies, absence of product
differentiation and complete mobility of resources is essential. Moreover, for Pareto optimality to
exist, the conditions of perfect competition must be satisfied for all markets including factor
markets. It is obvious that because of these abstract assumptions not working at the ground level,
the Great Depression had to be faced in 1929. The financial crisis of 2008 and development
experience thereafter as pointed out already underscores on the need of revisiting such unrealistic
assumptions.

It should be recalled that the new or endogenous growth model as a contribution to new
development theory was evolved by recognizing many imperfections in both product and factor
market especially in the developing countries. It recognizes the market failures emanating from
missing and incomplete information, externalities in skill creation and learning, and economies
of scale problem in production. The policy and investment coordination failures are also duly
recognized by it and institutional economics. Needless to add that the alternative human
development paradigm, decent employment led inclusive growth agenda and now many
components of Sustainable Development Goals (SDGs) set for 2030 either explicitly or
implicitly recognize that there are serious flaws in the neo-liberalism led development discourse.
In the context of contemporary capitalism, the studies point out that the last three structural crises
of capitalism – in the late 19 th century, the 1930s, and the 1970s – were resolved only after a
major restructuring of capitalism. The current crisis can be resolved only by another period of
major restructuring of capitalism (Kotz, 2015). In sum, notwithstanding the contribution of neo-
liberalism to stimulate market based system for efficiency in resource allocation and uses and
induce economies to move toward rapid structural changes and modernization through various
innovations and technological advancement, the adverse impact, by far, have overtaken the gains
with prosperity only to a few. As an offshoot, most suffers have been the economies and people
of developing countries in general and least developed countries in particular.

4. Important Lessons: A Need of Alternative Development Discourse Grounded on

Successful Country Experiences

Along with the failures of neo-liberalism to, among others, prevent or cope with the deepened
crisis and its wide-ranging ramifications across the globe, there are parallel attempts to evolve a
robust but comprehensive alternative development discourse to be most appropriate in the

24
For some discussions on these lines see, among others, Bardhan ( 2000), UNDP ( 2002), Khan
( 2002), Rodrik ( 2004), Stewart ( 2004), OECD ( 2004), Levitt ( 2006) and Plant (2009).
changed context or conditions. Grounded on revisit and unbiased reassessment of the East Asian
and some other country development experiences, theoretical underpinnings and study findings,
there are ongoing efforts toward that direction. The right based and other social movements
worldwide for more fair and equitable global order and guarantying of, among others, economic
and social right of the people has immensely contributed toward such endeavors. Although the
focus of debate and discussion is still on the most contentious issues like the role of institutions,
type of shifts in the ongoing development strategies and policies to be regarded as most robust,
there is broad consensus that the development discourse has to be primarily grounded on a
country specific conditions to be subsequently tailored with the external conditions on the
principle of interdependency on equal footing.

As is well known, both historically and contemporarily, the most contentious issue with very
diverse and opposing views is related to the role of the institutions as they, to a greater extent, are
influenced by the political institutions and interlinked ideological factors and hence play decisive
role in shaping the direction, speed and pattern of development, more so in the developing
countries. Even the study conclusions derived on the role of the state and government and market
institutions in the context of East Asian countries’ rapid development is found to be
contradictory and diverse. Noticeably, unlike the proponents of neo-liberalism always claiming
that the role of the market has been the key for the successes of the East Asian countries, the
facts based and relatively unbiased studies derive opposite conclusions which are forming the
principle bases of developing a new but more robust development discourse by challenging the
market fundamentalism orthodoxy.

In this respect, the findings of some the key studies including the study by Adelman (1999) and
Wade (1990) on government’s role in the economic development based on the experience of East
Asian countries are very instructive and hence are worth mentioning: First, institutional readiness
and development of market and other state institutions is vital for which the role of the state and
government is crucial. Second, institutional and policy flexibility accompanied by political
transformation are key for sustained economic development as they contribute to transform
domestic economic institutions for widely shared growth and domestic market expansion
simultaneously. More importantly, the political transformation is critical for political stability
and support to promulgate laws that contribute to promote markets in an efficient manner. The
adaptability of political institutions to provide support for the economic needs of rising domestic
commercial and industrial classes is necessary to convert initial impetus from exports into long
term economic development. Third, in the initial stage, primary role of governments consist of
social development, institution-creation, both economic and political, and infrastructure-buildup.
After the establishment of institutional and physical frameworks for development, the primary
function of government consists of the promotion of industrialization while raising the
productivity of agriculture. In each phase of industrialization, initially infant industries need
certain protection followed by gradual withdrawal but maintenance of certain incentives to
export-competitive industries must be ensured. Along with certain maturity of institutions and
acquiring of investment attitudes and skills by entrepreneurs and added by increased well being
or prosperity of the households with skilled labor constituting the predominant share in the labor
market leading to increased capacity of higher savings, the scope or need of government
economic policy intervention reduces sharply overtime.
In the context of East Asian countries broad conclusion derived was that the governments
"governed the market" in critical ways (Wade, 1990). Apart from the broad strategies pursued in
the line pointed out above, a number of other governments led specific economic policy
initiatives corroborate such a conclusion. Unlike the free trade rules, import substitution and
export orientation policies through adequate incentives were pursued simultaneously there with
some added focus on the exports in which selective industrial policies including quantitative
controls beyond tariffs and policies of stable exchange rate were pursued. At the same time,
enough care was given to ensure that agriculture at least becomes moderately productive and
modernizing added by development of domestic market through creation of government
institutional conditions favorable to technological improvements, investments in education and
transport. All these indeed created conditions to the overall investment including government
investment in infrastructure, human resources development and industrialization in countries like
Korea and Taiwan, China25. The final conclusion of the study by Adelman (1999) is more
interesting. The study says that had Washington consensus been enforced on the East Asian
countries during the fifties, sixties and early seventies, there would not have been an East Asian
miracle.

Thus, the role of state and government institutions including political institutions played pivotal
in the development of East Asian countries. Similarly in China, amidst socialist market economic
system, state’s role has always been very vital and important. But as East Asian country
experiences and many others indicate, state character and quality of institutions including
political institutions is very vital to drive the economy at a fast pace by keeping nation’s interest
at the forefront. As an offshoot, rule of the law, effective check and balances in the state system
as a part of nullifying both internal and external captured practices and strengthening genuine
democratic practices including transparent and accountable governance and regulatory system at
different institutions both vertically and horizontally are important. Similarly, state’s role in the
smooth functioning of the factor, product and financial market institutions fairly becomes vital in
order to check captured practices and monopolistic tendencies. On the other extreme, some
orthodoxy views in the name of pleading the pro-active role of the state and government in
preventing various market led distortions and promoting equitable development often undermine
the devastating impact of state or government failures that world has experienced time and again.
This means, as experience indicates, while recognizing the important role of institutions in
general and state and government institutions in particular sufficient care has to be taken to
downplay the extremes views (either only government or only market matters) in the alternative
development discourse. To put it differently, as studies indicate, today smooth function of market
is most important part of the development process for which an appropriate institutional
framework and its effective regulation is very vital.

Another interlinked debatable issue is that what type of strategic shift in the development will be
appropriate for sustained growth and development. As is well known, one of the earliest and
most central insights of the literature on economic development is that development entails
structural change. In this context, a study by Rodrik and McMillan (2011) on globalization,
structural changes and productivity provides many insights from the development strategic

Studies by Krugman (1994) and Lau (1997) point out that exceptionally high rate of physical
25

and human capital accumulation played decisive role in the economic growth of both Taiwan and
Korea.
perspectives. The study finds that the countries that manage to pull out of poverty and get richer
are those that are able to diversify away from agriculture and other traditional products. As labor
and other resources move from agriculture into modern economic activities, overall productivity
rises and incomes expand. Citing the East Asian countries and China, they argue that the speed
with which the structural transformation takes place is the key for the successes to accomplish
productivity enhancement and prosperity. They also point out that rapid industrialization was the
key for these countries’ early takeoff. It is also well known that land reform and other
accompanying agrarian reforms in countries like Korea and Taiwan-China played crucial role in
the transformation process including creation of relatively egalitarian social structure in the early
phase of sustained development. More mature development strategies with some pro-active state
role to insulate the economies from the global crisis has, unlike many other countries, enabled
the East Asian countries to perform exceptionally well at the moment also.

It is clear that a process of structural shift outlined above by contributing to enhance allocative
efficiencies can potentially be an important engine of growth. When labor and other resources
move from less productive to more productive activities, the economy grows and manifests
further if the retained labor productivity in the traditional sector also grows simultaneously.
High-growth countries have typically been those that have experienced substantial growth-
enhancing structural change. Now the question is that what type of transformation process has
taken place in the countries which have been less successful in their development endeavors?
Equally importantly, why now many countries including China despite successes so far are
confronting with new type of problems? A quick review of the underlying reasons of such
tendencies including some of the steps taken by some countries provides additional bases why
there is a need of drastic changes in the development strategies.

Truly, as countries experiences indicate, it is not necessary that the structural change must follow
the classical pattern i.e. from agriculture to industry and then services in this age of globalization
with services sector expansion being more phenomenal. The UNRISD study (2010) identifies
several distinct, currently observable development paths, including the classic transition to
manufacturing, industrialization with dualist labor markets (many Latin American countries,
with a large urban labor force of self-employed, domestic labor, and small enterprises) and
service-led growth ( through increasing tradability of services for instance in India). However,
the major problem identified by the study is that in most of the African and other poor countries
driven by urbanization and decades of neglect of agriculture, rapid labor migration out of a
stagnating agriculture sector into an informal services sector—with even lower productivity- has
taken place. Understandably, when labor moves from stagnating agriculture into ‘low-value’
services and the informal sector, this does not create the same opportunities for stable and
growing incomes or other improvements in living standards. This is where the crux of the
problem lies despite structural changes (Greenstein, 2015). One of the most striking findings of a
study by McMillan and Rodrik (2011) is that in many poor countries broad patterns of structural
change have served to reduce rather than increase economic growth since 1990.

One of the biggest problems under the neo-liberalism as pointed out by a recent study is that a
premature de‐industrialization has augmented in many countries with potentially significant
economic and political ramifications, including lower economic growth and democratic failure
(Rodrik, 2015). The study shows that a hump‐shaped relationship between industrialization
(measured by employment or output shares) and incomes has shifted downwards and moved
closer to the origin indicating that countries are running out of industrialization opportunities
sooner and at much lower levels of income compared to the experience of early industrializers.

Thus the study findings reveal that amidst lack of transformation in agriculture and jump in
fragile services sector with added vulnerability in the labor market, the overall productive
capacity of many economies including export capacity has dwindled overtime. A study based on
the survey of the country performances on the trade front shows that the export-led growth
actually has promoted economic structures that deliver low quality growth and prevent the
development of deep prosperity (Palley, 2011). It adds that within countries, development has
shallow roots because it is externally focused—a phenomenon exemplified by export processing
zones. It further points out that internationally, export-led growth promotes a race to the bottom
as countries try to gain competitive advantage by any means leading to, among others, wage
suppression and low labor and environmental standards.

Continued vulnerability in exports amidst stagnation or crisis in many economies added by

financial market turmoil’s adding more uncertainty in the already slowed economy; China has
started rebalancing its economy since 2010 through replacing export led development strategy by
internally demand led development strategy. India has also started refocusing on industrialization
drive through a make in India slogan. Now there is growing realization worldwide on the need of
refocus on industrialization which was deliberately neglected in the past because it, contrary to
neo-liberal premises, demands certain selected policy incentives and interventions and in a way it
also entails on the need of pursuing import substitution strategy to some extent 26. Needless to
add, industrialization drive requires an integrated or comprehensive development strategy since it
not only requires high quality social and physical infrastructure facilities including new
technology, transport, banking, business and other modern services but also needs
commercialized and modernized agriculture. It is for these reasons that industrialization is
considered as synonymous to internally driven or self-reliant development discourse.

More precisely, studies focus on the need of a strategic shift in two important fronts
simultaneously. The first is the priority shift toward the development of fundamental capabilities
in the form of human capital and second is the structural transformation (Rodrik, 2013) as
already pointed out. The focus on the productive capacities is now recognized to be essential on
the ground that it by expanding productive employment opportunities leads to enhance inclusive
growth27 and reduces poverty simultaneously. Such combined strategies by necessitating
investments in social and physical infrastructure including investment in new technologies,

26
For various aspects of political economy centric discussion with the theme who is afraid of
industrial policy see Memiş and Montes (2008) and for importance of industrial development see
Szirmai (2011).
27
The emerging consensus on inclusive growth is that it is a both pace and pattern of growth
which through certain distributive relations and institutional structures ensures positive
movement of growth and distribution resulting into disproportionate benefits to the poor and
deprived people of various forms. Equally important element is that it conceives an ex-ante
rather than ex-post (accidental outcome or benefits) approach in the policy decision making
processes and hence involvement and participation of the people in both processes and outcomes
of growth and development is regarded to be a prerequisite. See for comprehensive review
(Thorbecke, 2014).
know-how and innovation only could create productive synergies within and between sectors of
the economy for enhancing exports as well in a more sustainable way through diversification,
upgrade and changes in the structure of production and trade, among others28.

Such a strategic shift focused on changing dynamics of production structure with assurance to
distributional gains to the large section of population will require major reforms in macro and
other economic policies. Studies indicate that in place of pro-cyclical macroeconomic policy
rules of neo-liberalism29, a well-designed macroeconomic policy for development with a mix of
sound countercyclical policies and policies of diversifying production structures would be
essential. Countercyclical policies are regarded to be important to address the problems posed by
abrupt external financing cycles and sharp fluctuations in commodity prices through fiscal,
monetary and exchange-rate policy mix. This also requires regulation of short term capital flows
as well as the experience of major crisis in 1997, 2008 and recent bubbles and bust cycles in the
asset and financial markets of developing countries with very damaging economy-wide effect
indicates. As an offshoot, strong mechanism to control illicit flows is also emphasized.
Progressive taxation, income and wage policy including asset redistribution policy is the added
thrust. It is equally emphasized that the policies should also be designed in a way that could spur
the development of the production sectors and contribute to foster innovative economic activities
leading to the strengthening of domestic production linkages. As an offshoot, regulation in
domestic financial sectors, sound balance sheets in the banking system and external debt
structures is regarded to be essential part of the macro policy. This is why creation of long term
domestic markets for assets denominated in the domestic currency and developing well
functioning derivative markets as protection against exchange rate and interest rate fluctuations
as a part of financial policy is emphasized. In short, it is argued that macroeconomic policies
must be growth-centric with full employment as the ultimate objective (Ocampo, 2011).

As the proponents of strategic shift in development approach indicate, a robust industrial policy
is a must. It is argued that the industrial policies in the context of developing countries should
pay attention in the three important dimensions: innovations (in a Schumpeterian sense), linkages
(Hirschman), and surplus labour (Lewis)30. This, as experience shows, necessitates devising such
an integrated policy framework that could support domestic resource based both large and small
scale industries that could expand and flourish from the grass roots contributing to industrial
revolution in a new way. In a multinational dominant supply chain based trading system, a
network from the grass roots is regarded to be critical to check the exploitation and reap
maximum benefits locally. The trade policy is thus suggested to be such that it should facilitate
new production, trade and supply chain structure accordingly.

The most important paradox, however, is that a major policy overall linked more predominantly
to systemic issues will be the biggest challenge in a given situation in which internal and
external institutional and class relations amidst growing their nexuses with ruling class and
elite’s pose major problems. As is clear, the dynamics of the current global economic and
28
For such line of reason See www.development Paradigm Shift UNCTAD.pdf
29
See www.Policy space and the changing paradigm. Antonio Ocampo and Rob Vos.pdf to find
out how pro-cyclical macro policies have been detrimental to the human resources and physical
infrastructure development including discouraging effect to the private sector investment.
30
Role of industrialization in the context of sustainable development see UNDESA (2007).
political order have resulted in monopolized market powers with business interests tightening
their grips on the state’s political system added by powers to supranational institutions without or
limited democratic accountability amidst narrowed electoral choices and increased restrictions on
protests in the different pretext. The commodification of public goods and services including
land, water and public spaces, informalisation of labour and unemployment with declining real
wages or widened wage gaps, slummification of cities and worsened environmental problems
including declining of biodiversity threatening viable livelihoods are outcome of this and that, as
pointed out above, have resulted in unprecedented rise in social inequalities, among others. By
implication, this entails on the need of parallel movements and initiatives in both internal and
external fronts to revert or modify such a trend. Externally, a new fair and equitable global order
will be necessitated through the creation of new financial architecture including a new beginning
in which all major decisions are made through the UN processes. This is clearly indicated by the
UN Stiglitz Commission of 2008 and many others engaged in anti-inequality, pro-people and
sustainable development linked movements globally. Certain cap on short term capital flows,
introduction of financial transaction tax, control in illicit flows, progressive taxation, promotion
to the green economy for viable livelihoods, arrangement of alternative international currency
and flows of aid to the developing countries as per commitments, among others, is being
advocated. Internally, need of social movement in a constant manner is also being advocated for
deepening the genuine democracy as one of the effective means to continuously pressurize for
correcting both strategies and policies that are making the economies of developing countries
crisis prone and unsustainable.

5. Political Economy of Nepal’s Past Development Discourses (1960-2015) from Self-

Reliant Development perspectives

When discussing Nepal’s development discourse from political economic perspectives, it is

necessary to link with political regime type, decision making processes, broader development
objectives, strategies, policies and implementation mechanism adopted to translate the objectives
into achievement. To what extent the dominant socio-economic structure and relations including
institutional arrangements perpetuating underdevelopment or hindering the development of
productive forces have been addressed in that process becomes critically important. Equally
important is that how, along with integrating the economy with outside world, the external
economic and trade relations affecting the entire development discourse including ramification
on the production and distribution structures and relations becomes equally important from self
reliant development perspectives. Taking these interrelated factors into account, below Nepal’s
development initiatives and efforts distinguishing two broad phases of 1960-1990 and 1990 to
2015 representing autocratic and democratic period respectively are critically analyzed in which
manifestation of both ultra leftist and rightist tendencies during the later period has also been
taken into special consideration.
5.1 Period of Absolute Monarchy (1960-90)

As is well known, after a short period of 18 month’s parliamentary democratic practices, the
absolute monarchy was imposed in Nepal through the royal coup de tat of 16 December 1960.
As a ruling political mechanism, party-less panchayat system was introduced with the provision
of periodic elections in different tiers in a non-political basis. Apart from national panachayat to
village and town level non-politically elected bodies at the local level, different occupational
organizations were also provisioned to extend the support base through encouraging people’s
participation in an individual basis. In parallel, development programs were launched through the
implementation of different periodic plans. Beginning with three year plan in 1962, seventh five
year plan (1985-90) was almost completed before the collapse of the absolute monarchy and its
patronage -panchayat system as a political tool designed to prolong the autocratic regime. As
such, these were grounded on business as usual presumptions simply bypassing the fully
centralized feudalistic state system and its dominant discriminatory institutional and structural
structures perpetuating vicious circle of poverty and deprivation of various socio-economic
groups. As such, through different plans and time to time various campaigns or slogans, attempts
were made to strengthen such a socio-economic structure at the base that could help to
consolidate the grip of the absolute monarchy. Even if various institutions created based on
changed needs at different levels, these were guided by the same motive. In the absence of check
and balances and suppression of dissent voices including the constructive criticism, there was no
any feedback loop to check or minimize the worsened misrule, governance failures and
mismanagement in the development programs for correction or changes.

As an offshoot, broad economic system perused and policies practiced or experimented time and
again were guided by the motive of serving economic interest of monarchy to a greater extent
and assuring the economic benefits to the ruling elites including feudal, privileged business
houses and others having close connection with the royalties. The land reform program, for
instance, was simply motivated by the aim of appeasing the landless and poor farmers to counter
the steps taken during the short period of previous democratic government to bring about
changes in the feudal land ownership and tenure system. The protective economic regime in
general and import substitution policy in particular institutionalized rent seeking and corrupt
practices. The quota, subsidy, rebates and other protective custom and tax schemes implemented
in the name of benefitting farmers, providing reliefs to the common people and promoting
business and industry largely led to raise distortions, anomalies and weaken competitive strength
of the economy and also contributed to fuel resource liability to the state. Consequently, despite
some progresses in socio-economic fronts on the average partly due to very generous financial
and technical support of the development partners and friendly countries, no noticeable
progresses could be made in breaking the vicious circle of poverty, uplifting the downtrodden
from deprivation and enhancing growth and development. At the ground level, mushrooming of
black economy was encouraged through a mechanism of under and over voicing in trade added
by incentives to re-export cheaply imported goods from third countries to highly protected
neighboring country market with very adverse effect on industrial development including
exportable industries and modernization of agriculture. Such means used either formally or
informally have had very long term implications on Nepal’s path to self-reliant development.
Rooted in no philosophical and particular development routes added by disarray in the overall
development governance emanating additionally from adhoc system and practices in the whims
of monarchy, political and economic crisis manifested and deepened overtime. The marked rise
in the gap between haves and have not’s overtime with a few becoming the neo-wealthy and
majority of the people remaining at the bottom with more hardship and misery contributed to
augment resentments across various section of society leading to mass protest and uprising of the
people. This compelled to declare referendum in 1979. After a narrow victory of panchayat
despite riggings and manipulation, the panchayati rulers felt unsecured and followed the tactics
of appeasement by making government expenses recklessly relying primarily on the deficit
financing resulting into bigger foreign exchange crisis from the beginning of 1980s. This
compelled the rulers to go on for the standby credit with the International Monetary Fund (IMF)
in 1985/86 under the stiff conditions laid down in it. This was followed by the implementation of
Structural Adjustment Program (SAP) of the IMF and the World Bank in the subsequent fiscal
year. With these, unlike the protectionist economic regime practiced before 1985 in the name of
mixed economic system, market oriented policies were internalized and augmented. A short
description will help to understand how during the autocratic system despite huge foreign aid,
technical and financial support to establish many important industries aimed at raising Nepal’s
self reliance capacity, the economy was in doldrums by the time the political crisis heightened
leading to the collapse of absolute monarchy and its patronage party-less panchayat system in
1990 (Maxwell Stamp, 1990, MoF, 1991 and NPC, 1992) 31.

In the political front, various political tiers were created to attract people to participate in
political and other processes with some believes that that will help to pacify the discontent and
ensure political stability. But popular participation of the common people became increasingly
impossible because of the power remained within the bureaucracy and concentrating at the top
among those who retained the king's favor (Blaikei, 2001). The higher echelon of the
bureaucracy was composed of influential elite groups who enjoyed a monopoly over educational
opportunities in a situation where the literacy rate was very low and no job was available outside
the government. The political climate worsened especially after the introduction of the
nomination system in 1974 as it isolated the common people from the top-down hard-core
panchayati patrons. Thus, by the year 1979 the king had become the pivot around which the
traditional interest groups, sacred elite and the landowning aristocrats revolved. The palace
secretariat had become the nerve center of administration and political structure. As a result, the
elected legislative body just served as a rubberstamp, the judiciary became subservient, and a
series of arbitrary laws were enacted that could be called “lawless” (Panday, 1999). Widespread
frustration from the system's political impotence increased the potential for opposition from
bureaucrats at lower echelons, small-scale businessmen, industrial laborers, teachers, students
and unemployed graduates. The unrest outburst in 1979 and compelled the king to declare a
referendum. Although party-less panchayat was declared victorious, the narrow victory even
after manipulation was perceived as a treat to the system. Then a phase of reckless expenses
through deficit finances was augmented. This deepened both political and economic crisis
further.

In the development front, a three year plan (1962-65) followed by five periodic plans from 1965
to 1990 were implemented. A quick survey shows that increase in production including
agriculture production with priority to the agriculture sector, development of infrastructure,
promotion to the industries and trade, economic and price stabilization, creation of productive
employment opportunities and social justice were the major objectives stated in one plan or the
31
Very comprehensive analysis on the state of economy of that period is discussed in the
government white paper published in 1991 (MoF, 1991). More rigorous quantitative analysis
proving how distortions and anomalies aggravated in the economy compounded economy wide
problems is found in Maxwell (1990). Above all, more comprehensive evaluation on the
performance of the economy during the Panchayat period is found in the Eighth Plan (NPC,
1992).
other in a general fashion. In terms of distinctness, regional balance and integration was focused
with the beginning of the fifth plan (1975-80). Similarly, basic minimum needs were also
included as one of the objectives in the same plan. The last seventh plan (1985-90) of the
panchayat period had given highest priority to the fulfillment of basic needs as that coincided
with the declaration by then King to push Nepal to the Asian standard in fifteen years (1985-
2000) but without qualifying what it was and how it could be measured. Interestingly, this was
the period when both political and economic crisis had heightened as pointed out above and
more interestingly unlike the conditions under the SAP demanding less government intervention,
a pro active or interventionist role of the state and government was required for the basic needs
program. Therefore, by and large, it was a political gimmick, as exemplified by the additional
facts that there were no any concrete proposals to ensure the production of specified basic needs
at the first place followed by corresponding assurance of access to basic needs among the
common people. Going through the overall strategies and policies stated in different plans,
largely they were lopsided without attention on bringing about reforms in institutional set ups
and arrangements for the effective implementation. In a system revolving around absolute
monarchy driven by the tactics of maintaining status quo in such areas, such a push was not
possible either. Such a problem was quite visible in the context of basic needs program as well 32.
The objectives set and priorities fixed or envisaged in plans were driven largely by the donors
interest and hence a larger gap between the planned resource allocation and actual realization
was always persisting during the different plan periods added by low but larger discrepancy in
aid disbursement across the sectors leading to burgeoning of aid effectiveness problems overtime
(Khanal et al, 2008 and Panday, 2011).

In the economic front, state led protectionist policies under the banner of import substitution
industrialization were perused. Prior to 1983 there was no trade policy as such in the documented
form. The trade agreements with other countries including India and frequent government
announcements were the main bases of the external trade. For almost fourteen years beginning
from 1970, an export exchange entitlement scheme (bonus voucher) was practiced linking
imports with exports. It encouraged smuggling of third country-imported goods to India with
increased trade disputes. Such a scheme had disincentive environment to the industries. With the
introduction of first new trade policy in 1983, various policies such as de-licensing of exports
except those banned or put under quantitative restriction, waiving of income tax on export
earnings, introduction of duty draw back system on those imports which were used as inputs for
export including bonded warehouse facility, procedural simplification and formation of a high
powered National Export Trade Development Council was announced. But ambiguities and
compliance emerged as major problems.

In the exchange rate front a dual exchange rate system was introduced in 1977 which was
modified in 1978 to limit too much distortion. Again in 1981, a cash subsidy program was
introduced as an alternative measure aimed at boosting exports. However, this scheme also could
not operate properly due to heavy burden on government's budget added by problem of delays in
distributing subsidies.

Industrial policies were also experimented from time to time. The first industrial policy
formulated in 1962 was revised first in 1965 and again in 1967. Again in 1974, a new industrial
32
For a quick review of development planning during the panchayat period see khanal (1993).
policy was brought out with focus on both import substituting and export oriented industries.
This was declared without any care on the negative impact of unrealistic exchange rate policy
and policy of quantitative restrictions on exports growth. In 1981 a revised industrial policy was
announced with some specific provisions in rationalizing incentive system and simplifying
procedural matters. But the piecemeal approaches including administrative hurdles and distorting
practices were detrimental toward promoting industries. On the whole, lack of appropriate
policies, direct controls and other protective measures including import licensing, high import
tariffs, overvalued currency and other direct price control and quantitative restrictions prevented
move toward rapid industrialization including technological upgrading. The restrictive trade
regime at the same time encouraged unproductive activities such as smuggling, lobbying, and
evasion of tariffs and building of plants with excess capacity in order to obtain import licenses
(Sharma and Bajracharya, 1996). As a result, the overall industrial development pattern became
highly detrimental to promote high value added industries and exploit the comparative
advantages that Nepal was enjoying in the international markets (Maxwell Stamp, 1990). Anti-
export biases and trade deflection for political expediency purposes were major hindrances for
the genuine development in the trade and industrial front. More precisely, the dominant
protectionist policies especially in trade, industry and exchange rate together with burgeoning
bureaucratic institutions in the midst of a top-down development process triggered the economic
crisis, which worsened people's hardship (Panday, 1999 and Blaikei et al, 2001).

Along with mounting crisis in the industrial and trade front added by stagnation in the agriculture
due to, among others, deliberately failed unscientifically designed land reform program with
many distortion type practices in the interest of landlords and big farmers, the crisis in the
economy mounted. Together with political crisis in 1979 followed by referendum, financial
indiscipline and anarchism heightened year after year leading ultimately to unprecedented rise in
internal borrowing. This in turn fuelled excess liquidity in the economy, which in turn induced
imports in a big way. In a situation of meager foreign exchange earnings from low exports which
was highly inadequate to meet excessive demands, Nepal for the first time after 1975 recorded
balance of payments deficit in 1983 in the order of Rs. 675 million. This trend continued up to
the period prior to the implementation of Economic Stabilization program of IMF followed by
the SAP as pointed out above.

It should also be pointed out that the trade and transit problems with India always remained
additional major hurdles toward promoting and diversifying trade and augmenting
industrialization in Nepal. The transit costs accompanied by high transportation cost, delays in
clearance and delivery at sea ports as well as cumbersome procedures at various customs transit
points in India used to raise, for instance, the cost of imported raw material by the extent of 50 to
100 percent. Nepal indeed hardly enjoyed the transit right then and similar prevention is
continuing even today as will be discussed later. The additional costs, thus, were instrumental
further to deteriorate trade competitiveness and enhance export potentials. The clauses of
requiring 90 percent raw materials and labor component either of Nepal or Indian origin in the
trade treaties were invariably preventing easy access of Nepali manufactured goods to the Indian
market. Conversely, the special trade relationship was providing protective market to the Indian
manufactured goods in Nepal despite Nepal's terms of trade remaining highly unfavorable (Islam
et al, 1982). The trade blockade in 1989 fuelled the crisis further not only in trade and BOP
fronts but also in the entire economy.
A closer evaluation of the plans and programs of the entire Panchayat period by the National
Planning Commission (NPC) showed that in different fronts the performance was very poor and
more so in the external trade and payments fronts (NPC, 1992). The growth was hardly 3.3
percent during the period 1964/65 to 1989/90 with more favourable contribution by the
agriculture sector partly driven by extended cultivation in the uncultivated new lands. Hardly 18-
20 products constituted the major share in the organized sector manufacturing. The share of
gross fixed investment had marginally increased to 15.9 percent of GDP in 1989/90 from 13.4
percent in 1974/75 with deceleration in non-government fixed investment during the same
period. More worsening situation was in the domestic saving front as its share reduced to 6.1
percent in 1989/90 from 10 percent in 1974/75. With the fast rise in government expenses with
its share reaching 21.6 percent of GDP by 1989/90 and corresponding internal revenue share
hardly reaching 10.2 percent of GDP, the dependency on external aid magnified overtime with
its share reaching 61.1 percent of development expenditure by 1989/90. More worryingly, along
with the implementation of SAP the loan component of aid jumped by reaching 75 percent in
1989/90 with fast rise in debt obligations. Although there were some progresses in socio-
economic front, they were not linked up with augmenting production, productivity, expanding
internal productive capacity of the economy and ensuring the socio-economic empowerment of
the most deprived due to the reasons pointed out above. During the entire panchayat period of
thirty years, little more than 2500 km of black topped road was constructed. Access to health and
education among deprived was perpetuating despite some steady expansion in schools, colleges,
hospitals and health posts. All these had cumulated effect on the poverty with the poverty ratio
remaining in the neighbourhood of 49 percent33 at the time panchayat was overthrown. Amidst
very low domestic saving and very high aid dependency, the size of commodity import reached
more than 3.5 times of commodity exports by 1989/90. Although a shift in trade direction took
place over the years with third country trade share reaching 70 percent in 189/90, re-export of
third country imported goods to India through smuggling played the most important role. Trade
blockade by India in the late 1990s was also responsible for this. Even then, the current account
deficit reported officially showed that it reached Rs 7754 million in 1989/90 from just Rs 120
million in 1974/75. Thus, along with inviting external interventions in the economic policy
making, the external dependency heightened during the panchayat period. The accumulated
problems of path dependency syndromes and legacies are hunting even today in both internal and
external fronts.
5.2 Democratic Period with Short Autocratic Regime (1990-2015)

With restoration of democracy in 1990, a new democratic constitution was promulgated

bestowing, for the first time, sovereign right upon the people. However, unlike many revolutions
forcing overhauling of existing superstructure and auxiliary institutions, reforms and changes
were proposed without too much disturbance to the preexisting establishments, power and social
relation as constitutional monarchy was accepted under the multiparty parliamentary democratic
system. Nonetheless, from the overall socio-economic development point of view, besides
focusing on welfare oriented social system, transformation of national economy into an
independent and self-reliant one was envisaged in the constitution. This in turn demanded that

An independent estimate carried out by the NPC during the Eighth Plan exercise shows that
33

poverty reached 49 percent by 1990.

minimum reforms and changes in the state structure and governing system are introduced in
addition to a new direction to the development discourse to overcome from the institutional,
policy, program and implementation related hurdles and bottlenecks. As an offshoot, numerous
changes in the political, governing and economy related fronts were initiated after the restoration
of democracy.

In the state system, attempts were made to strengthen a system of check and balance in the
executive, legislative and judiciary which is considered to be the backbone of the liberal
democracy. Besides ensuing parliamentary election periodically, decentralized system of
governance as per the constitution was made mandatory under which both district and local body
elections were carried out to institutionalize democratic system from the grass roots. To
strengthen that process, a Local Self-Governance Act was introduced in 1999. Similarly, an
Interdependent Anti-Corruption constitutional body was formed to strengthen governance system
and thereby strengthen democratic polity.

At the economic front, both periodic development plans and liberal policies were implemented
and intensified simultaneously. The Eighth plan (1992-97) formulated after the restoration of the
democracy had laid down some specific targets. The plan had fixed the objectives of achieving a
sustainable growth, alleviating poverty and reducing regional imbalances. Along with the growth
rate of 5.1 percent, a target of generating employment to more than 1.4 million labor forces was
kept in the plan. The objective of the Ninth Plan (1997-2002) was to alleviate poverty in which
focus was given on implementing poverty-focused sectoral and targeted programs in a
coordinated, integrated and effective way. It had set 6 percent growth target with strategic
priority on integrated development of agriculture and forestry sectors, acceleration of industrial
development, reduction of economic and social inequality, streamlining of the development and
expansion of modern sectors through liberal, market-oriented economic policies including active
role of the government in developing and building rural sector. The main aim of the Tenth Plan
(2002-2007) was also to alleviate poverty in which mobilization and optimal utilization of means
and resources through mutual participation of government, local agencies, non-governmental
sectors, private sector and civil society was stressed. The Tenth plan which was treated as PRSP
had envisaged four strategies viz, high, sustainable and broader economic growth, social sectors
and rural infrastructures development, targeted programs and good governance. Rather unusually
and to comply with PRSP conditions, two growth targets, minimum 4.3 and maximum 6.2
percent were kept in the plan (NPC, 1992, 1997 and 2002). More broadly, despite focus on
governance reforms with priority to community and user’s group participation in the local level
program, institutional and structural reforms regarded to be the key for enhancing the efficiency
and effectiveness of central level programs was hardly considered. Creation of independent
poverty fund to address poverty exclusively through community’s direct involvement was one of
the important initiatives of the same plan.

In the economic policy front, it was attributed that reform initiated in mid 1980s was neither
adequate nor effective in promoting market orientation and enhancing efficiency (Cohen, 1995).
It was recognized that, besides administrative structure being inefficient, fragile and excessive
rent seeking, the legal system was too archaic, unpredictable and unreliable (Dixit, 1995). It was
also realized that tariffs on output and non-tariff barriers including quantitative restrictions were
contributing to the anti-export biases (Maxwell Stamp, 1990). Amidst changed political milieu
with high expectation of the people added by liberalization drive in India and other countries
including donors’ pressure to intensify liberalization prompted the democratic governments to
embark on the path to liberal economic system. It was assumed that many hurdles, distortions
and inefficiencies would be corrected by a market based system. As a major ingredient, the
strategic focus was on promoting export led growth and development.

As is well known, in the early 1990s, India after foreign exchange crisis had shifted its policy
towards market orientation. Given the open border, landlockedness and very small size of the
Nepali economy vis a vis India, it was difficult for Nepal to pursue policies that were completely
at variance with the policies followed in India. After initiating drastic economic reforms, India
had devalued its currency against dollar by 20 percent in June 1991. Nepal had followed suit by
devaluing Nepali currency by 20.9 percent against the Indian currency in the first week of July
1991. In March 1992 Indian currency was made partially convertible in the current account in
which foreign exchange earners were allowed to exchange 60 percent of their earnings at the free
market rate. Nepal followed quickly by providing such facility at 65 percent. In a situation of
fixed exchange rate with India and free and unlimited convertibility of Nepal currency into the
Indian currency, Nepal also tried to harmonize the domestic interest rate structure with those of
India. Similarly, tariff structure was also synchronized to some extent to discourage diversion
and deflection of trade. With the purpose of maintaining the level of competitiveness of domestic
industries against imports from India, sales tax and excise duties in Nepal were also partially
streamlined.

As an offshoot, major liberalization drive was carried out after the implementation of the
Enhanced Structural Adjustment Facility (ESAF) of the IMF in 1992. As a part of fulfilling
ESAF conditions, at first Nepalese currency was devalued massively against international
currencies. Then various steps were taken to bring about drastic reforms in the tariff structure. In
addition to drastically reducing tariff rates, rationalization of tariff structure was also pushed
simultaneously for minimizing dispersion in the rates. Acts such as Industrial Enterprises Act
(1992), Foreign Investment and Technology Transfer Act (1992) and Privatization Act (1994)
were enacted. The VAT was introduced in 1997 followed by the implementation of new Income
Tax Act in 2002. Like in many other countries implementing conditional donor’s programs,
privatization, deregulation, openness and minimization of the role of the government formed the
main ingredients of the liberalization drive. After the implementation of PRSP also, this was
continued despite program’s focus on poverty reduction, social development and better
governance. Consequently, Nepal emerged as one of the highly liberalized countries in the
South Asian region by the beginning of 21st century (GoN, 2004 and Khanal, 2009). Except in
small and cottage industries, 100 percent foreign equity participation was allowed. This was true
in insurance and whole sale banking sector also. Out of hundred, about three fourth foreign
equity participation was granted in the private banks. The services sectors including tourism
sector was opened with priority. There were also attempts to initiate capital account liberalizatio.
Beyond WTO obligations, no subsidy or quantitative restrictions were applicable in both exports
and imports. Thus, Nepal was far ahead of many other SAARC countries as well-known that a
policy of fast openness in some critical areas have been initiated or expedited by some other
SAARC countries only recently.
As obvious, certain reforms in state and other related institutions, attempts to strengthen
democracy at the top as well as local level through, among others, decentralization, efforts to
streamline bureaucracy to expedite development programs, implementation of periodic plans
with priority on agriculture, socio-economic infrastructure and poverty reduction and
liberalization drive to promote private sector led development with added trust on exports
industries contributed to bring about some noticeable changes in both political and economic
fronts. The awareness of the people was growing phenomenally. The expansion in free media
was striking as an important pillar of the democracy. The civil society movement accompanied
by establishment and expansion of NGOs was also quite phenomenal which included expansion
of community based organizations as well. A system of people's participation from the grass
roots in strengthening people's rights enhanced which worked as an agent of change in the
society noticeably. The decentralization additionally contributed to involve people in the
selection, execution and monitoring of the programs at the local level based on the local needs
and conditions as a part of enhancing their ownership as well. Abrupt rise in the block grants to
the local bodies in 1995 was the most noticeable step to that direction. Similarly, universal
pension and other schemes launched in tandem were very instrumental to enhance social security
among the most vulnerable people in the society. Likewise, the involvement of community as
well as private sector in the development of health and education also rose considerably over
time. Creation of democratic environment including liberal environment created ground for the
level playing field to the people at large leading to creation and expansion of social and
economic institutions having impact on the production and social relations. Various rules and
regulations to enhance market institutions contributed to enhance the role of the private sector in
the economy. The liberal environment was also instrumental to create foreign employment
agencies and promote foreign employment for higher earnings aboard. A rapid expansion in
banking and financial institutions, cooperatives and saving credit institutions in both urban and
rural areas also took place during this period as a result of enabling environment created to the
private sector and various socio-economic groups of the society (Khanal, 2014). But despite
such achievements, the overall performance in both political and economic fronts was far below
expectation and in many instances was opposite to the provisions made in the constitution
leading to growing resentment of the people in general and various disadvantaged groups in
particular.

As is well known, in democratic societies there exist several channels by which the interest of
various contending classes and groups are or could be accommodated. The check and balances in
the state constitutional organs including enforcement of accountable and transparent system,
adaptation of democratic processes in making or reforming rules and regulations by representing
the voices of different section of society and policy coordination in a discriminatory socio-
economic settings perpetuating social contradiction are regarded to be important means of
democratic polity. But the irony was that amidst power centric rivalries and group-ism in the
political institutions, neither minimum democratic norms to deepen democratic system or system
of policy and political coordination was practiced and strengthened. First of all, the pre-existing
rules of the game including bureaucratic and other governing institutions and structures that were
prevalent during the autocratic regime were continued. As a corollary of this, no attempts to alter
the pre-existing unequal or exploitative production and social relations perpetuated since
centuries were attempted from the base. In this context, it is also worth mention that a drive
toward economic liberalization, privatization and open up polices were pursued and intensified
under external conditions or influence without internal home work and consultation with various
stakeholders. As such, the initial conditions including unique socio-economic features were
hardly taken into account. Above all, the major focus was on continuing or grabbing power
through whatever means for immediate political gains rather than on deepening democratic
system. The wide spread nepotism and undue favoritism was gradually crossing the norms and
values leading to creation of anarchism and accountable less system (Panday, 1999). The most
striking feature of the Nepalese executive was its discretionary power of patronage at all levels
(International IDEA, 1997).

In the area of economic reform, the major problem was such that only most vocal and
resourceful stakeholders and groups having access or nexus with the power centers and ruling
elites almost prevailed. The nexus between the internal elites and external forces additionally
played a significant role to that end. The involvement of the same houses or group’s in diverse
areas like businesses, industry, banking, finance, insurance, real estate etc. was outcome of this.
Although acts, policies and programs of the government had to be passed through parliamentary
processes, they used to be hardly discussed with due priories. In the absence of binding to the
government to take approval of those policies announced outside the parliament, major policy
decisions were made without policy co-ordination or involvement of concerned stakeholders.
Even the negotiations with donors on economic matters with binding conditions and affecting the
economy and people at large were hardly tabled to the parliament for its approval. These types of
practices steadily led to authoritarian tendencies and adhocism in the functioning of governments
spoiling institutional development in the country (Baral, 2000).

The reform policies, at the same time, were biased or partial with predominant emphasis on
deregulation and opening of the economy. Care was not given even to fulfill some required
initial conditions while pursuing reforms. In many instances policies were implemented without
laws and market institutions. In the absence of policy co-ordination through wider consultation at
political and stakeholder level in policy making, policies were captured by some vocal and
resourceful small group. No complementary policies or safety net programs were implemented
simultaneously to compensate the losers34. This led to increase the vulnerability in the society.
As a result of increased patronage and clientalism system, the benefits or outcomes of the
deregulation centric reform could not trickle down. The agriculture sector was bypassed in the
reform process ignoring the agrarian reform key to ensure equitable growth and self-reliant
development. So much so, strategies, policies and programs embodied in the Agriculture
Perspective Plan (APP) focused on enhancing self reliance in food, developing horticulture and
augmenting agro-based industries considering ecology driven prospects were hardly
implemented. As an offshoot, subsidies provisioned in the APP were abruptly withdrawn
violating own commitment but without consultation with farmer's representatives. Similarly, the
privatization program was started from the profitable enterprises that too established by the

34
There are many channels through which macroeconomic policies would have distributional
impact. Reduced demand for jobs, wages, and enterprise income, changes in relative prices,
spending cutbacks and changes in value of assets (including depletion of financial assets) are
some of the effects generally observed. The second round effect would have more dangerous
long term effect as a result of increased cost of living or livelihood problems compelling poor
families to send their children to household works rather than schools.
friendly countries and hence it became most controversial from the very beginning. In deed this
became one of the major contributors to the deindustrialization process in the country.

On the other hand, the reform was delayed in the banking sector partly due to increased nexus
between the ruling elites and unethical business houses which led to almost collapsing of two
state banks that compelled contracting out of these banks. Only after 2002 a big bang reform was
initiated in the banking and finance. By and large a homogeneity assumption approach was
adopted in the policy making process following readymade neoclassical model ignoring the
spatial, region and local specific conditions or prospects. The price hike centered policies
accompanied by privatization propaganda made transaction cost very high and also public
enterprises (expect those were encouraged to raise prices frequently) became increasingly drain
to the government exchequer. Asymmetries in macro policies along with rising transaction cost
have had adverse effect on the competitive strength of genuine industries. Cartel or syndicate
system created monopolistic tendencies in both factor and product markets leading to
undermining of efficiency in resource use or escalation of market prices (IPRAD, 2009). The
transaction cost, a major determinant of trade, became very high in Nepal (GoN, 2004). High
transaction cost and other distortions continuously encouraged informal trade between Nepal and
India (Taneja and Purohit 2000). The export focus without linking with highly potential domestic
resource based agro, forestry, and other industries on the one hand and deliberate attempt to
undermine the importance of import substitution industries amidst erosion in competitive
strength of the economy in general and exports in particular led to increase external dependency
markedly overtime which was opposite to the provisions in the constitution. Water resources
development was always trapped into controversy driven by various interest groups hurting the
growth of industry and services sectors as well. Above all the dilemma in water resources
development eroded the brighter prospects of self–reliant development which is one of the
principle reasons for Nepal’s too much suffering today. Tourism also largely suffered in the
absence of required drive as one the most promising sectors. As an offshoot, little attention given
to address serious structural and institutional constraints 35 amidst major focus on liberal regime
for economic panacea affected small industries, small businesses, marginal and small farmers,
workers in the informal sector and deprived people very adversely. Despite such a tendency, no
attention to pursue entitlement or right based approach in the areas of health and education were
given as complementarities to ensure social justice or equity. No food security policy was
advanced and pursued. Reforms in state, bureaucratic and local institutions could not be pursued
effectively key for better outcomes and delivery. Despite focus on local governance, entire
system was top down and legal constraints impeded that process further and hence true bottom
up and participatory development became mirage rather than reality. The role of state and the
private sector never was spelt out at the ground level based on country's unique socio-economic
conditions as per constitutional provisions. More importantly, contrary to democratic norms or
principles, no accountability or responsive system was in place which could punish those who
used to violate constitution and cheat people through captured means as pointed out above also.

Amidst such tendencies, the monarchy was active most of the time to defame and weaken the
democratic system with some critical constitutional powers with him in a situation of certain
35
Constraints in these areas in countries like Nepal are different from neoclassical assumptions
under which deregulation and privatization and narrowly focused governance related institutional
reforms are emphasized.
hold or influence in different governing structures, privileged classes and revivalist forces. In the
mean time, violent conflict started in the mid-1990s was intensified across different parts of the
country by exposing the major weaknesses inherent in the parliamentary democracy with
monarchy as a constitutional head. Similarly, the problems in the functioning and delivery in
general and perpetuation in exclusion and deprivation in various forms even after the democratic
practices were used to galvanize the militant support against parliamentary democracy. With
intensification of the conflict and awfulness, function of the government and undertaking of
development programs including investment through the private sector were badly affected or
halted in addition to destruction of many existing socio-economic infrastructures. This was used
as a pretax to abolish parliamentary democracy and takeover all power by then King Gyanendra
in 2005. A brief review of the overall performance in the economy before imposition of
autocratic system is briefly highlighted below to pinpoint how overtime economy deteriorated
along with problems in deepening the democratic system.

One of the key features of the Nepalese economy is that in the post liberalization period also, no
breakthrough in attaining higher growth in a more sustainable manner could be accomplished.
One interlinked and worrying phenomenon was the lack of widely shared or high quality growth.
Although during the initial post liberalization period (1990-95), growth rate was relatively high
at 5 percent on the average, this was possible due to upward swing in the non-agricultural sector
activities including marked increase in exports of manufacturing products emanating from more
capital intensive and urban centric investments of the private sector (Khanal et al, 2005). Plan
wise, the growth rate was 4.9 percent during the Eight Plan period (1992-97) followed by 3.6
percent during the Ninth Plan period (1997-2002). In Tenth Plan period (2002-2007) growth rate
was reduced further to 3.6 percent. More worryingly, along with deepening political instability
and violent conflict, the growth rate decelerated to about 2 percent during the period 2000-2005
with non-agricultural sector registering merely 1.5 percent growth rate (Khanal et al, 2012).
The growth pattern indicates that higher growth up to the mid 1990s in the non-agricultural
sector was due to relatively better performance of sectors like electricity, transport, finance and
real estate. This also could not be sustained for long for the reasons pointed out above. Growth
was not satisfactory not only in agriculture but in manufacturing and trade also. Along with
inability to sustain growth momentum, rapid shift in the economic structure also could not
continue for long. The share of both manufacturing and trade continuously dropped added by
collapsing of cottage and small scale industries in a big way. The cascading tariff structure and
other policy distortions encouraging capital intensive and low value added industries coupled
with undiversified exports confining in a few products created a condition in which gains were
largely overtaken by the big trading and commercial houses at the cost of manufacturing
entrepreneurs and others. At the same time, contrary to expectations, transaction cost including
per unit cost of infrastructure also escalated. Labor productivity also worsened (GON, 2004). All
these had wide-ranging adverse effect.

The share of first 40 percent household had income share of 23 percent in 1985. It reduced to
15.3 percent in 1996 and further decreased to 14.2 percent in 2004. Conversely, the income share
of richest fifth quintile went up to 53.4 percent from 50.3 percent during the same period. As a
result, despite considerable decline in consumption poverty from 42 percent to 31 percent during
the period 1996 to 2004, the inequality increased alarmingly during the same period. According
to the NLSS 2004, the Gini coefficient rose to 41.4 in 2004 from 34.2 in 1996. More worrying
phenomenon was the large variation in developmental gains across the developmental and
ecological regions. Also the gap between rural and urban areas increased markedly in the period
1996 to 2004. A study by Asian Development Bank shows that during the period 1996 to 2004,
the rate of growth in inequality in Nepal was the highest compared to other countries of Asia and
Pacific region (ADB, 2007).

In a traditional agrarian society, access to land is crucial in enhancing the social status and
improving living conditions of the people. To a greater extent, the power relations are also
governed by these patterns. The agriculture census data show that there was growing
proletarization of the marginal and small farmers. The ratio of landlessness increased from about
15 percent in 1996 (NESAC, 1998) to 23 percent in 2001 (CBS, 2001). Within the most deprived
dalit community, the situation was alarming. About 48.7 percent of this community was holding
less than 5 ropani (ropani is a local land area unit and approximately equals 0.05 hectare) of land.
Similarly, the number of the landless population in hudke, dum, gaine, badi, and dhobi was 100,
88.2, 41.2, 39.1 and 33.3 percent, respectively (National Dalit Commission, 2003). In a situation
where productivity in the agriculture sector had remained stagnant and was grappling with the
problem of rising input and falling output prices, vulnerability of majority of the farmers in the
post-reform period rose markedly. The government expenditure pattern also worked adversely.
Studies indicated that in 1999/2000, despite higher budget amounts allocated to local
development, education and health, the share of spending that were directly related to the poor
stood at less than one-third of total spending (UNDP, 2002).

The government job distribution among the various socio-economic caste and community groups
was not satisfactory despite democratic practices. In 1984, 2.8 percent of the ethnic communities,
constituting more than 37 percent of the total population, were occupying higher positions in the
government bureaucracy. No one was represented from the dalit caste. Even 15 years later, in
1999, there was no major structural shift in this aspect. Of the total number of government
employees, ethnic communities accounted for 8.4 percent and dalits much lower at 0.17 percent.
Thus, the civil service remained a monopoly of the privileged classes and higher castes. In terms
of representation in the parliament also, the situation was quite similar (UNDP, 2004).

Despite changes in economic and employment structure to some extent, not only the problem of
both employment and underemployment magnified but also the discriminations in the
employment opportunities perpetuated overtime. As reported by the CBS survey (1999), the ratio
of labor force engaged in agriculture was still very high at 76.1 percent. On the other hand, out of
the 23.9 percent of the labor force employed in the non-agriculture sector, 73.3 percent was
engaged in the informal sector leading to 94 percent labor force working in the informal market
without guarantee of minimum wages and job security. The discrimination by gender, caste,
skilled and unskilled was extremely high in the labor market (ILO, 2002). Moreover, closure of
cottage and small enterprises day by day together with extinction of traditional occupations in
rural areas was exacerbating vulnerability among the most disadvantaged (Blaikei et al, 2001).
Allocation of resources and services had failed to address the problems of the most vulnerable
socio-economic groups of the society. As an offshoot, access to credit was a bigger problem. As
in the past, the proportionate share of informal supply of credit was above 80 percent. The
majority of the targeted credit programs had failed to cater to the needs of the bottom 20 percent
of the households as they lacked other resources and knowledge to benefit from the savings and
credit programs. In such a situation, phasing out of priority sector lending had an adverse effect
on poor rural households. Taken together, slowdown in the non-agriculture sector and very low
productivity and commodity diversification in rural agriculture was generating very adverse
effects on the level and pattern of employment (UNDP, 2004).

Despite both physical and social services expanding steadily, there was a growing asymmetry
between facilities on the one hand and affordability and access to services on the other. In all the
development regions and ecological belts, female literacy was far below male literacy. It was
worse in the mid-western and far-western development regions. Among the caste groups, the
literacy level among the Dalits and deprived ethnic community was very low. The pattern was
almost the same in health services. The way commodification of education and health facility
had intensified, it was gradually making the affordability a major problem (UNDP 2004). On the
whole, such a very uneven and discriminatory system in all development and other related
spheres led to intensify distributional conflict and contradictions in the Nepali society. Both the
democratic processes and liberal reforms contributed very little to alter the privileged class
dominant political, economic and social structure.

Amidst these tendencies, the phenomenal growth of exports that took place up to the 1990s could
not be sustained thereafter. The exports share which had jumped up to 24.2 percent in 1994/95
from 10.5 percent in 1989/90 reduced to 14.6 percent in 2004/05. On the other hand, imports
rose steadily to reach 29.5 percent of GDP in 2004/05 from 21.1 percent in 1989/90. This had
very adverse effect on trade gap which reached 14.9 percent of GDP from 10.6 percent of GDP
during the same period. More worrying phenomenon was the export concentration of traditional
commodities to India and a few commodity concentrated exports to the third country amidst
dwindling export capacity as well as competitiveness. Contrary to trade creation expectations,
there was also significant trade diversion from third country to India in this period. Similarly, the
domestic saving which reached 14.8 percent of GDP in 1994/95 reduced to 11.6 percent in
2004/05. Despite almost stagnancy in gross fixed investment, due to steady rise in government
expenditure and falling domestic saving, excessive foreign aid dependency continued (MoF,
2007). Thus, contrary to the constitutional focus on self-reliant development, the country was
dragged into opposite direction. As an offshoot, the immature or controversial privatization
contributing to deindustrialization has had very adverse effect on the direction toward self-reliant
development.
After the takeover by then king Gyanendra by abolishing parliamentary democracy in 2005, an
understanding between the democratic forces and forces engaged in violent conflict was worked
out by agreeing to abolish autocratic system and restore democracy through peaceful democratic
means. This resulted into the mass movement in a massive scale throughout the country leading
to overthrowing of monarchy in 2006. With the historical changes, some bold decisions having
far reaching implication on the state, political and economic system were made. Nepal was
declared a republic. It was also declared a secular state. Commitments were made to bring about
transformation in political, economic and social front. State restructuring for a federal system of
governance was committed. Now after a long painful transition, the second Constituent
Assembly (CA) succeeded to formulate a New Constitution which is regarded to be highly
progressive as it, in addition to institutionalizing many of the early historic decisions, has
ensured excluded and deprived. The economic and social rights of the people in the critical areas
have been fixed. To bring about progressive changes in the feudal productions relations and
ensure land right to the landless commitment to a scientific land reform has been made there
which is the key for agrarian transformation. A guarantee of property rights and economic
freedom to engage in any occupation has been ensured. Although there is still dispute about the
number of states and boundaries to be settled through political consensus or state restructuring
commission, Constitution has proposed the seven states. Grounded on inclusive and participatory
federal system of governance, a three pillar economic system with both catalyst and
complementary role of the state, private sector and cooperatives has been provisioned in the New
Constitution as a means to accomplish the economic objectives of making Nepal equitable,
inclusive, self-reliant and prosperous (GON, 2015). Thus, with the New Constitution and its
transformative progressive provisions in the state, political, economic and social system, there
are high expectations that, with its implementation effectively, faster development of productive
forces and accompanying changes in production and distribution relations will take place for the
prosperity of the nation and well being of the people in general and downtrodden in particular.
Notwithstanding the long political transition added by the devastating effect of earthquake and
bigger economic crisis emanating from trade blockade by India, the post 2006 experience and
complexities mounting in different fronts, however, indicate that the challenges are many and
highly precarious.
Truly, after the sweeping political change, many reforms have been made in the different fronts.
Grounded on Comprehensive Peace Agreement (CPA) and Interim Constitution of Nepal 2007,
the first Three Years Interim Plan (TYIP-2007-2010) was formulated in which a long term vision
of building a Prosperous, Modern and Just Nepal was postulated in the plan. The reduction of
unemployment, poverty and inequality was the specific objective laid down in it. Although no
big departure in the subsequent three year plan is found, employment and poverty reduction
oriented sustainable and broad based growth were the major objectives of the next three year
plan (2010-13) (NPC, 2010). The current Three Year Plan (2013-2016) which is to be completed
in this fiscal year aims to graduate Nepal from the least developed category to a developing one
by 2022. It also focuses on inclusive, broad-based and sustainable economic growth grounded on
three pillar economy. In addition to early two plans fixing the growth target of 5.5 percent,
current plan envisages the growth rate of 6 percent besides aiming to reduce poverty from 23.8
percent in 2013 to 18 percent in 2016. In terms of strategies, relief, reconstruction and
reintegration, productive employment, pro-poor and broad-based economic growth, good-
governance and effective service delivery, increased investment in physical infrastructures,
priority to social development, targeted programs and pursuing of inclusive development
processes are found included in one or the other plan.

To ensure inclusiveness in the bureaucracy, a policy of positive discrimination was perused

vigorously and has now been strengthened added by number of affirmative action in different
areas. Another area which received high priority in the post 2006 period is the areas of social
security. In general, to bring certain coherency with the focuses of the plans, certain changes in
priorities, policies, programs and implementation mechanism were also carried out
simultaneously. New strategies in certain sectors were framed along with policy changes in some
key areas. A trade integration strategy was framed in 2010 in which 19 potential exportable
goods and services ranging from agro-food, manufactured products to services like tourism,
health, education, engineering and hydro were identified based on the comparative and
competitive advantages criteria (MOCS, 2010). Amidst failures of previous Agricultural
Perspective Plan implemented in the mid 1990s, an Agricultural Development Strategy (ADS)
was developed in 2012 which focuses on the need of transforming agriculture and enhancing self
sufficiency in many essential products through massive expansion in input facilities to the
farmers, promotion to the value and supply chain in various products and above all raising total
factor productivity growth in the agriculture (MOAC, 2012). It should also be added that abrupt
withdrawn fertilizer and irrigation subsidy in the late 1990s was restarted in 2008/09 though in a
limited scale. A major initiative was taken to attract investment, both domestic and foreign by
establishing Investment Board under the Chairmanship of the Prime Minister in 2010. This has
enabled to attract foreign investment in energy and other priority sectors to a greater extent. A
new Industrial Policy was also announced in 2010 which provides tax related facilities and
concessions based on the size and nature of the enterprises (MOI, 2010). In recent budgetary
announcements, some stress on the need of promoting import substitution industries is also found
which not the case was earlier as proponents of liberalism used to avoid that word.

Along with adherence to the policy of fiscal balance and economic stabilization, continued
attempts to bring about reforms in both revenue and expenditure front were made. As a part of
this, a high level parliamentary public expenditure Commission was constituted in 2010 which
had stressed on the need of considerable improvements in the public expenditure management
(MOF, 2011). Through budgets, attempts to rationalize expenditure and enhance expenditure
managements are there. Under rationalization of expenditure, priorities to ease or minimize
supply side bottlenecks in critical areas are being made. Reforms in foreign aided projects and
programs are also being continued as a part of foreign aid effectiveness agenda. To comply with
the commitments made during the membership negotiation with the WTO in 2004 and also meet
the burgeoning recurring expenses, rationalization of tariffs and expansion of revenue
mobilization primarily through VAT and income tax is being continued.

Along with the manifesting of crisis in the banking and financial system resulting from rapid
credit growth in real estate and other consumable activities added by proliferation of banking and
financial institutions in an environment of weak supervision as pointed out by the (IMF, 2010)
also, various new initiatives to fine tune or correct monetary policy led distortions were pursued
which have now become the regular phenomenon. The ceiling on lending to real estate sector,
mandatory to priority sector lending, enhancement in financial inclusion, merger and acquisition
and above all effectiveness in regulations and supervisions are some of the important ingredients
of the monetary policy of today.

Amidst some slow down in pushing liberal agenda further in recent years along with many legal
and institutional barriers affecting, among others, the business and entrepreneurial environment,
almost three dozen new or revised acts were proposed in the budget of 2014/15. Despite slow
progresses, some of the acts have been passed by the legislative parliament and rests are under
considerations there. Now in the post New Constitution period, many new acts and changes in
the old acts are underway which may have wider implications on the economic front.

Despite long political transition and uncertainty with election to the CA two times added by
political wrangling among various contending political forces inside and outside the CA,
progresses in different fronts partly due to some new initiatives in the line noted above are
noticeable. In the political front, some big historical achievements made have already been
pointed out. The most important aspect is that level of awareness and awakening among most
deprived and excluded for getting political, economic, social and cultural rights has also
increased phenomenally. In some socio-economic fronts also, some good progresses have been
made. The consumption based poverty reduced to 23.8 percent in 2013 from 31 percent in
2003/04 (NPC, 2013). There was also reversal in the consumption based inequality in the post
2006 period. Equally importantly, many of the MDGs targets have been met with noticeable
progresses in the areas of health and education. As an offshoot, steady progress has been made in
the Human Development front with the HDI reaching at 0.490. Likewise, the expansion in
sectors like transport, communication, banking and finance have contributed to bring about some
structural changes in the Nepalese economy leading to non-agricultural sector share reaching
almost 70 percent. The share of services sector alone has exceeded 53 percent. Similarly, certain
changes in the employment structure have taken place with the employment share of the
agriculture sector reducing to almost 66 percent.

But the kind of socio-economic transformation along with productive employment, more
equitable and inclusive growth and development was expected that could not be materialized.
Except a growth rate of 6.1 percent in 2007/08, the growth rate never exceeded the targets set in
the plans. Interestingly, that too was due to the growth rate of 5.8 percent in the highly
fluctuating agricultural sector. The overall sectoral growth and accompanying contribution to
growth pattern shows that not only structural change is at a very slower pace but also it is
different from the structural change that took place in advanced and newly emerging countries in
the course of take off and rapid development. For instance, the share of manufacturing sector
has now reduced to almost 6 percent. A decelerating trend in electricity sector is also witnessed.
Similarly, construction sector which partly resembles the speed in transformational process in the
economy is passing through a stagnating trend. All the trends including wider fluctuations
indicate that despite competitive strength and brighter prospects in many areas no sectors could
emerge as leading dynamic sectors from sustainable growth point of view. Stagnation in the
agriculture sector productivity and sharp fall in the contribution of manufacturing value added
accompanied by urban centric investment in relatively less productive or capital intensive
economic activities amidst massive inflow in remittances is regarded to be instrumental for this
( Khanal et al, 2012). The same study pinpoints that high production and transactions costs added
by poor and low quality infrastructure, interest rate and other policy biases against manufacturing
industries, more stringent labor laws and over politicization of labor unions, very weak
regulatory system encouraging market distortions and above all immature liberalization policies
neglecting the threat of cheap products from other countries have contributed to augment de-
industrialization in Nepal. On the other hand, despite financial assets now exceeding more than
1.5 times of GDP, the access to financial services has remained very low as major investment of
banking and financial institution has mainly confined to the urban areas in general and capital
city in particular. At the same time, despite some new initiatives to change the pattern, the
composition of financial investment has been less contributory to augment investment in the
productive areas. On the other hand, the gross fixed investment is hovering around 20 to 21
percent of GDP. In view of incremental capital output ratio standing at around 5.0, such an
investment share hardly enables to accomplish the growth rate of 4 per cent. This raises the
question on the possibility of achieving double digit growth rate to graduate Nepal from LDC
category by 2022. Needless to add, the earthquake and trade blockade have added many new
challenges toward that end. The domestic saving rate which is in the neighborhood of 9 percent
is another bigger challenge which has received little attention. Amidst this, the fiscal front is
gradually becoming highly problematic especially from the standpoint of enhancing productive
capacity of the economy as a prerequisite to complement private investment and promote
sustainable growth and development.

A tendency of burgeoning of current expenses at the cost of capital expenditure is the major
problem in the government fiscal front amidst concentration of government expenditure in more
accessible area and privileged region. The level of current expenditure has magnified in such a
way that its share has reached almost 85 to 86 percent in the total government expenditure amidst
severe supply side bottlenecks and increased pressure for welfare and social security related
programs. How the likely pressure on recurring expenses along with expediting of federal system
of governance will be managed is another bigger challenge ahead. The problem is that the
medium term expenditure framework employed since 2002 with the aim of restructuring,
reprioritizing and streamlining programs which has serious flaws and is also obsolete in the
changed context is being used in a customary manner in the recent budgetary exercise also. More
importantly, in the name of fiscal balance or macroeconomic stabilization, attempts are always
made to curtail the capital budget not recurring expenses and hence the inefficiency, misuse or
mismanagement is by and large overlooked in a systemic manner. The added problem is that
there is always bigger gap between the budgeted capital expenditure and actual expenses leading
to continued shrinking of capital budget. This has also aggravated problems in maintaining the
general budgetary rules with massive expansion in non-budgetary expenses through transfers and
other means in one year after another. Although revenue performance in recent years has been
relatively satisfactory, such a trend hardly justifies the rationale for higher revenue mobilization.
From sustainable point of view also this could be problematic if performance of the economic
will not improve. Moreover, the dependency on international trade based revenue is still very
high contrary to the expectation that taxes like VAT will ease that problem in due course
(khanal, 2009). Such a revenue composition, at the same time, has a built in system in which
remittances based imports for obvious reasons are induced with aggravated problems in the
external trade front. All together as stated in a Ministry of Finance sponsored recent study also,
amidst political and policy uncertainty, electricity shortages, infrastructure constraints including
high transport costs, poor industrial and labor relations including labor rigidity, lack of
government effectiveness is the major problem for augmenting pace of development in Nepal
( MOF, 2014). If viewed from ex-anti point of view, it is clear that the problem are of
institutional and structural in nature compounded by a policy discourse which focuses on certain
technical matters rather that deep rooted problems in state and political institutions. So much so,
there is still ambiguity on the role of the state, private sector and cooperatives despite acceptance
to the three pillar economy.

Lack of or inequitable access or to land assets, financial and physical services, food and social
security etc perpetuating exclusion in the form of class, gender, ethnicity, geography etc has led
to remain deprivation based poverty in the neighborhood of 44.2 percent. The Human
development index derived at 0.490 is one of the lowest in SA and once inequality is adjusted it
reduces further by one third. Similarly, the HDI by caste and the eco-development region is
highly uneven and disproportionate (NPC/UNDP, 2014). Similarly, income based gini derived
shows that it is closer to 0.51 (ratio) which is one of the highest in the international comparisons
(Khanal, 2011).
One of the serious problems compounded is the labor market. Out of the total labor force, more
than 90 percent is still engaged in informal sector without job security. More than 61 per cent in
agriculture are self –employed without pay. The most worrisome characteristic is the very high
under and disguised unemployment. Among the employed persons, 32 percent workers work less
than 40 hours in a week. Out of 30 percent classified as underutilized, 49.9 percent in urban and
26.9 percent in rural areas are under utilized in which the share of youth population is
predominant (CBS, 2009). A recent study shows that the employment elasticity during the
period 2001 to 2011 has reduced to 0.18 from 0.64 during the period 1991 to 2001. In sectors
like manufacturing, trade and electricity, the elasticity has become negative (Khanal, 2015). In a
situation where more than 4.5 million work forces enter the labour market each year, such a trend
is very worrisome. Manifestation of low quality and jobless low growth amidst deceleration in
the production and productivity in production sectors coupled with expansion in low
employment generating services activities, growing skill mismatches and informalization are
aggravating unemployment problems. This is the reason why more than 1500 youths are
compelled to leave the country each day in search of job. Some new initiatives in the
employment front have dismally failed to accomplish their stated objectives. The self youth
employment program implemented with political big propaganda and one family one
employment program continued after 2006 also come to this category. Indeed, productive
employment has not been a priory policy consideration except assuming under neo-liberal
premises that growth largely takes its care in an automatic manner.

The most alarming trend is found in the external trade front. Along with dwindling of commodity
exports, its share has reduced to just 4 percent of GDP in 2014/15 compared to the commodity
imports share of 36.5 percent resulting into the trade deficit of 32.5 percent of GDP. The trade
deficit with single country India was about 20.5 percent of GDP in 2014/15 as out of the total
trade, share of India alone was 64 percent which still is lower than a general trend. In a country
with more than 66 percent engaged in the agricultural sector, even the essential food like rice and
paddy worth of Rs. 25 billion was imported from India in 2014/15. Similarly, billions of Rs. is
spent in the imports of vegetables, fruits, live animals etc. from the same country India.
Combining trade in goods and services also, the trade gap in 2014/15 was 29.9 percent of GDP.
Had there not been the massive rise in the remittances inflows over the years, the situation would
have been unimaginable. In the same fiscal year the inflows of remittances in GDP was 29.05
percent which is marginally lower than the trade deficit in goods and services (NRB, 2015). So
much so, for the petroleum product, Nepal fully depends on India. The trade blockade by India
and subsequent pervasive effect leading to standstill of development programs, halt in business,
occupational and industrial activities, supply disruption of food and other essential commodities,
among others, leading to economic and humanitarian crisis has generated serious question on the
appropriateness and viability of entire development discourse including economic and trade
policy regime that Nepal is pursing. This is also so in the context of implementing the critical
provisions laid down in the New Constitution linked to the economic matters as briefly state
above. This also raises the question on the sincerity of implementing the commitments made
after the big political change of 2006. If Interim Constitution, the plans and budgets are any
guide, they indicate that in no circumstances Nepal would have been in such a state of affairs.
Needless to add, the Interim Constitution had stressed on the self –reliant development discourse.
Similarly, all plans, budgets and policy statements have always talked about sustained growth
and development. This means that serious lapses are inherent in our outlooks and approaches.
This is the reason for serious problems toward improving export performance even in normal
circumstances.

More particularly, the kind of initiatives to promote internal production induced export trade,
enhance import substitution industrialization, compliance led self sufficiency in basic
commodities and diversifying of trade was required, this simply could not happen except some
policy or sweeping statements led rhetoric. For instance, the trade integrated study of 2010 if
examined closely, it follows simply static isolated approach by ignoring dynamic principles and
as an offshoot, despite mention about the problems such as poor investment environment, poor
trade facilitation, inadequate domestic services supports and weak regulations, largely ignores
interrelated structural problems affecting the trade front. Equally importantly, the fixed
exchange rate regime with India which has contributed immensely to erode competitive strength
of export trade and encourage inflows of goods with wider economy-wide adverse effect has so
far been bypassed from the trade and monetary policy related agenda. Amidst these, the kinds of
initiatives to pressurize India to correct various restrictions that were imposed in the trade treaty
of 2002 and thereafter were necessary have hardly been there. Instead, a dominant external
dependency or appeasement syndrome manifested further in recent years at the political level
amidst continued penetration of ongoing external dependency prone neo-liberalism led economic
discourse toward that direction. As well known, contrary to trade liberalization principles, in the
subsequent treaties after 1996, more stringent Rules of Origin (ROO) and Tariff Rate Quotas
(TRQs) and safeguard clauses have been in such treaties. It also designates 22 border crossings
that may occur through preferential trade.

On the whole, the major problem is the asymmetry between the transformational agenda set or
committed and the practices at the ground level. Indeed, a need of working out the robust
development frame for translating the set agenda into implementation or action was not
considered sincerely. This led to undermining of both institutional and structural constraints
blocking the socio-economic transformation and development. Hence, from the developmental
perspectives, the pre-existing unjust and obstructive political and economic institutions in the
outcomes of the policies and programs were largely ignored. As such, the revamping of state
institutions including bureaucratic institutions from that standpoint was almost forgotten. As a
corollary, no strategic priority and policy shift to energies potential sectors and areas of
comparative advantages was felt necessity. Instead of taking steps to correct inherent lapses in
the ongoing neo-liberalism led policy discourse which was also contradictory to the
transformational agenda in many instances, the same was followed, replicated and encouraged.
This gradually resulted into the re-predominance of the most privileged and other elites in the
corridors of powers leading to the strengthening of a status quo system along with erosion in the
momentum of revolutionary changes. A buzzword, New Nepal, lost its ground in short duration.
As such, the policies were geared toward encouraging investment in unproductive and non-
tradable activities providing quicker benefits amidst massive inflow of remittances. The
monetary and financial policy frames were instrumental to that direction. This, in turn,
contributed primarily to facilitate the accumulation of financial and trade led capital with strong
external linkages rather than industrial and agriculture induced capital in a more balanced and
complementary way. On the other hand, the focus on macroeconomic stabilization added by
continuity with same medium term expenditure framework set in 2002 under the PRSP led to the
phenomenal rise in recurring government expenses at the cost of capital or development
expenditure. The ultimate combined effect was on fuelling consumption demand which was
fulfilled through the imports which has led to the situation which has already been discussed.
Under such a development framework dictated by the neo-liberalism, the supply side of the
economy was almost bypassed at the ground level despite such a policy direction claiming the
opposites. The constraints to the investment including foreign investment had additional adverse
effect to the supplied side of the economy. The negligence to production sectors including
deindustrialization added by aggravation in energy crisis, physical infrastructure bottlenecks and
other constraints are outcome of such a discourse. This has had very adverse implication on the
generation of employment at different levels. The point to be emphasized is that, despite
proclamation through various documents, the discourse was opposite to the self-reliant
development. In the mean time, due to the political and other factors, the governance system
worsened. The absence of local elected bodies additionally escalated corrupt practices at the
local level too. In such a politico-economic environment, absence of coherency and clarity in
plan direction and required changes in strategies, policies and programs was quite apparent with
added problems in effective implementation. The political, policy and inter-ministerial level
coordination are added problems. In sum, although development of productive forces has taken
place gradually overtime, both trends and nature are more problematic and in many instances
opposite to the production relations that could ensure equitable, inclusive and self-reliant
development discourse with an added threat of aggravating contradictions between the
downtrodden and other various socio economic groups and various privileged and other rent
grabbing classes. All these, thus, indicate on the need of revisit and overhauling of development
discourse and accompanying apparatus and means to embark on the path set by the New
Constitution with sincerity.

6.0 Concluding Section: Prospects and Challenges of Self –Reliant Development Discourse in
Nepal

Today along with unprecedented rise in wealth and income inequality driven economic, social
and humanitarian crisis in societies and nations under the dictate of the neo-liberalism led
financial capitalism, the social contradiction is mounting across the globe. In addition to parallel
social movement against financial capitalism, the dominant political coalitions within the
mainstream political parties and outside are also being increasingly challenged by the coalitions
of more progressive forces representing workers, unemployed youth, marginalized groups and
other actors of social change in the western capitalist countries. A revival of nationalist
movement is also getting momentum in many European countries. Noticeably, often citing the
golden age of regulatory capitalism, a more balanced role of the state and market is being
championed as a means of alternative economic discourse for correcting market captured and
manipulating practices to change the dominant political and economic order. As an offshoot, the
focus is on revitalizing the real sector of the economy through, among others, more innovation
led industrialization for shared growth and employment which could also help to minimize the
misbalances of real sector with crisis embedded hyper financial sector of today.

On the other hand, amidst global uncertainty with deepening or looming crisis, many mighty
fast-growing developing countries such as China which in the past were depending excessively
on export led growth are rebalancing their economies through various structural reforms to
enhance internal demand led growth and development. This is being attempted, at the same time,
without jeopardizing too much export growth potentials. Moreover, unlike some biased, broadly
agreed view is that more judicious governing the market role of the state was instrumental in
enhancing productivity led economic transformation and prosperity in the East Asian countries
in which export led growth accompanied by import substitution industrialization played a
decisive role. It is also recognized that unlike under state protected regime creating many
distortions through rent seeking and other practices, the government’s in these countries played a
catalyst role in creating business and industry friendly environment through appropriate legal and
institutional frameworks and priorities. Needless to add, most of these economies even today
have been able to insulate their economies from the adverse effect of today’s deepened or
looming global crises to a greater extent.

Conversely, countries like Nepal are in the crossroads with deepening crisis fueled by
proliferation in excessive external dependency led vulnerabilities grounded on the development
discourse followed. More worrying phenomenon is that despite historical political change of
2006 accompanied by major overhaul in political and state system together with commitments
toward bringing about prosperity in the country through rapid socio-economic transformation,
the economy is in despondency. The devastating earthquake followed by trade blockade has
compounded the problems further. However, a positive development with high expectation is the
promulgation of a progressive New Constitution after many years’ political wrangling which
gives highest thrust on the economic agenda and sets the broad political and economic
framework through which Nepal should move ahead fast. Higher economic growth and
prosperity through equitable, inclusive and self-reliant development discourse grounded on three
pillars economic system is perhaps the most noticeable and important ingredient of the New
Constitution especially from the political economy standpoint. This indeed entails a development
paradigm shift. Therefore, prosperity in a more inclusive and equitable way along with
enhancing of self-reliant development is a real challenge for Nepal amidst poor experience of
post 2006 period. The problem has been such that as opposed to commitments, neo-liberalism
led development discourse was continued grounded on status quo or business as usual governing
system. Today’s major concern is that whether the major reforms and changes required in
different fronts to be compatible with the development paradigm shift as stipulated in the New
Constitution are carried out or , as in the past, more rhetoric or political gimmicks are repeated
and practiced. Therefore, a real testimony of the political forces lies ahead with probable effect
on easing or augmenting contradiction in the society with implications on the future political
discourse. Broad development strategy and direction of reforms and changes required in different
areas from the standpoint of self-reliant development is suggested below for debate and
discussions.

Breakthrough in Institutional and Structural Barriers: Not to repeat the past mistakes or failures,
the foremost priority should be bringing about institutional and structural reforms targeting
economic and social fronts both horizontally and vertically to be compatible with the direction
set by the New Constitution. Grounded on the devolution of political power and authorities in the
economic and social fronts, such reforms and changes at three governing levels have to be
carried out beginning from the centre in this early transition to the federal structure. The new
rules and regulations that are now being framed must take institutional and structural barriers and
paradoxes into account which have hindered the tapping and use of country’s natural, physical,
social, financial and human resources more inclusively, equitably, efficiently and effectively.
The discriminatory, resource draining and anti-poor/deprived people centric institutional
arrangements strengthening dominant social and economic structure and hindering the
development of productive forces must be overhauled. For this, for instance, certain area and
privileged people centric top down institutional arrangements must be restructured for changing
the dynamics that under the existing system government and private sector resource flows
including banking sector flows, access to physical, social and financial services and opportunities
facilitate the unbalanced, discriminatory and unsustainable system. As an offshoot, there is a
need of overhauling resource drain, corrupt, inefficient and ineffective governing system rooted
structurally in the institutional set ups and arrangements with equal focus on socio-economic
spheres. This is why deepening of democracy through strengthening of rule of law accompanied
by enforcement of transparent and accountability system is regarded to be critical in the Nepalese
context. Needless to add, apart from strengthening market institutions, reforms in political
institutions by strengthening democratic practices including transparent and accountability
system has to form the integral part of overall reforms.

Clarity on the Role of the State, Private Sector and Cooperatives under Three Pillar Economy: One
of the major virtues of the New Constitution is that it recognizes state, private sector and
cooperatives as three pillars of the economy and also envisages their catalyst and complementary
role in the economy to some extent. But may be due to very differing views of the political
parties, the kind of clarity on the role of the state and markets was anticipated in the light of
envisaged development discourse is not there. There are many ambiguities and vagueness
needing clarity in the course of advancing coherent and compatible development strategies. In a
today’s market based world system, strengthening of private sector role is a must. The property
right, freedom to choose occupation, guarantee to free movement to factors of production as well
as goods and services are the most critical ingredients toward that end. Needless to add, creation
of level playing field through various facilitating means, improvement in investment
environment and assurance of better returns are the pre-requisites.

However, for smooth functioning of the market and providing level playing field more fairly and
equitably, market imperfections and captured practices inducing crony capitalism has to be
stopped. To strengthen the desired capitalist development path through restructuring of
investment toward productive areas, such a course correction is a must. More specifically, the
deflationary, exclusionary, commoditification (like private school, private hospital, private
pension, private health insurance, private care for children etc) and anti-entitlement biases
inherent in the neo-liberalism led market fundamentalism needs corrections to enhance more
inclusive and equitable growth and development. Various means to curb rising inequality and
reducing poverty along with guarantying of fundamental rights in the areas of food sovereignty,
health, education, shelter etc as per the constitutional provisions becomes the state responsibility
in which priority to strengthen social security of the most vulnerable people is a must. State
needs pursuing of pro-active positive discrimination policy to strengthen inclusive structure in a
phased wise manner. Prevention of a rising tendency of monopoly, carteling and syndicate
system in a situation of divestment of even natural monopolies including public utility services
from the public to the private sector is the state responsibly having very adverse effect on
equality, poverty and sustainable growth. State, hence, has to play a vital role in creating robust
market institutions as well as effective regulatory system for facilitating the smooth functioning
of the market. Such a course correction or adjustment in addition to enhancing the domestic
policy space including reshaping the external economic and trade relations will have positive
effect on inducing the domestic economy to a greater extent. Recent literatures corroborate this
and argue on the need of rewriting the rules of the market economy to ensure greater equality
and reining in the financial market with effective regulation and appropriate incentive
structures36.

As recent experiences show, in addition to creation of enabling environment to the private sector
through better governance and infrastructure facilities, certain incentive structure for promoting
investment in productive areas with focus on reindustrialization drive by added propriety to
promote cottage and small industries, small business and small numerous services grounded on
spatial development discourse becomes the state responsibility in the Nepalese context. As an
offshoot, state has to play a vital role in the development of rural economy, among others,
through a transformation in the agrarian structure besides playing critical role in the planned
development of urban areas amidst rapid haphazard urbanization and fast environmental
degradation. The bottom line is that unlike isolated, partial and sometime asymmetrical approach
with increased mess, a coherent comprehensive approach must be followed.

At the grass roots, there is a need of both development and streamlining of cooperative
movement in Nepal to encourage expansion in production centric cooperatives and discourage
various anomalies and malpractices in the name of cooperatives. Largely, the cooperative
movements as complementarities to the private sector and the government have to be considered
as catalysts toward mobilizing resources, enhancing equitable growth and augmenting self-
reliant sustainable development from the grass roots. In this respect, state’s role becomes vital in
eliminating ambiguities in the financial system and practices as well for enhancing financial
inclusion, augmenting priority sector lending and diverting financial resources from
unproductive to productive sectors and activities. In all, the role of state, private sector and
cooperatives has to be conceived in terms of catalyst and complementary role in line with mixed
economic system but however, under, unlike in a conventional way, the distortion and monopoly
preventing liberal market setting. Stated differently, a more balanced role of the state and market
for preventing both state and market led deficiencies and excesses should be there with added
focus on strengthening public-private-cooperative’s partnership. Notwithstanding the varied
outlook and standing of diverse political forces, the common ground should be strengthening of
check and balance system including effective rules and robust governance system at all levels to
prevent public sector led economic failures or crisis. The participatory democracy including
system of countervailing mechanism as complementarities needs priorities. The bottom line
approach should be such that the changes and reforms in the role of institutions are advanced in a
way that the transmission mechanism and likely ramifications are ascertained in advance.

Comprehensive Development Strategy Grounded on Long Term Vision with Major Focus on Self-
Reliant Development: For bringing prosperity in a relatively short period of time, a robust
development strategy preceded by a long term vision is a must in which structural and
institutional reforms and changes and rebalancing of the role of the state and market in the line
discussed above form as preconditions. Truly, apart from a practice of framing periodic plans
based on somewhat long terms visions, long term exercise associated with graduating Nepal
36
See at https://www.project-syndicate.org/commentary/whats-holding-back-the-global-
economy-by-joseph-e--stiglitz-and-hamid-rashid-2016-02-08.
from least developed country to developing country by 20022 along with a framework toward
fulfilling Sustainable Development Goals (SDGs) by 2030 are available. They, however, need
much more improvement to bring about coherency in the goals and targets besides ensuring
compatibility with the New Constitution. At the same time, more transformative and dynamic
approach will be needed to overcome from static or business as usual syndrome. Therefore,
making these exercises as references, a long term vision accompanied by a robust,
comprehensive and coherent development strategy to be compatible with the New Constitution
will be essential in which reconstruction program should be part and parcel of this. In that how,
in what way and when, for instance, Nepal will be reached at the level of newly industrializing
country of today at the same time ensuring the consolidation of inclusive, equitable and self
reliant development path should be clearly indicated. More important dimension of the strategy
should be such that the tactics or means proposed should have their robustness so that the goals
set, unlike the past, could be made trustworthy and achievable. More broadly, the development
strategy should be restructured in such a way that it in addition to recovering the income looses
and physical capital damages by earthquake enhances the productive capacity of the economy
markedly overtime through the means of harnessing, developing and utilizing natural, physical,
human and financial resources more judiciously and equitably to propel and sustain domestically
driven development in which along with increased internally resource generating capacity and
internally induced exports external dependency in whatever form are minimized and zeroed in a
certain time period.

The key hinges on the extent of boldness in reconstructing, reprioritizing and shifting
development strategy from the past. The foremost thing is that contrary to stabilization, socio-
economic transformation should be the bases of new strategies. This means conceiving
agriculture as a backbone of the transformation, priority should be given to the
commercialization and modernization of agriculture following overhauling approach with
emphasis on productivity enhancement which, in turn, will create spillover effect on the
diversification and expansion in both industry and other potential services sectors with added
contribution to move away of workforce from agriculture to these expanded sectors leading to
the changes in both the economy and employment structure simultaneously. This will help to
correct ongoing structural changes that have been detrimental to induce domestically driven
growth and productive employment and more importantly reverse excessive dependency
syndrome.

A strategy of human development, social capital formation and social security should form the
integral part for enhancing employable capacity, ensuring workers rights, augmenting economic
opportunities and minimizing the vulnerabilities in societies so as to strengthen more equitable
production structures and social relations at the economic base. More focused and workable
strategy pertaining to quality education in technical field and other areas, skill formation and
advancement, enhanced access to health and education of deprived should be evolved as a part of
capability enhancement of human resources key for productive employment led equitable
growth.

The social security should form an integral part of the overall strategy. Apart from upscale and
extension of existing system including adaptation of universal health and education facilities,
security to informal workers and other vulnerable population should be the key ingredient of it.
In place of isolated appeasement approach, a comprehensive and coherent strategy in this area is
needed in which wealth creation and production inducement could be inter-liked with it based on
the nature of the program and target groups (Khanal, 2012).

Emphatically, land reform must be one of the most important ingredients of the agrarian reform
which, unlike conventional way, be linked to the market system. This will enable to bring
landless and marginal farmers into the mainstream of development. Input and extension services
as well as infrastructure facilities should be important component of the agrarian reform to
facilitate in diversifying and commercializing the agriculture. A strategy of inducing off-farm
economic activities including inducement to local resource and skill based industries should be
perused through structural and institutional reforms in which better access to market should be
the core of such a strategy.

Indeed there is a need of parallel alternative forms of production, consumption and redistribution
as a part of economic transformation making agrarian reform as a critical base. For this, parallel
production, exchange and distribution organizations have to be further promoted and streamlined
through farmers, workers, cottage and small scale industry and businesses cooperatives within
the value chain frame in which saving and credit could form an important component. This will
also help to
combating the decent work deficit in agricultural production system. As an offshoot, there is a
need of calibrated strategy to bring about self sufficiency in certain viable food commodities,
fruits and vegetables accompanied by a consolidated export and import substitution strategy to
promote exports of agro and forestry based industrial products as well as enhancing of self-
sufficiency in important agro-based products which now constitute major imports.

Grounded on agrarian transformation, human capability enhancement and strengthening of social

security system, a new strategy has to be evolved with focus on both export based and import
substitution industrialization. This requires some sweeping changes in the strategy pursued in the
areas of taxation, tariff structure, credit system and institutional arrangements added by a built in
effective incentive structures. Apart from domestic resource based, import raw material based
industries to be competitive due to location, labor and other host of factors could be strategically
advanced. In such a course, large and strategic industries could be promoted with the help of
foreign investment which would help technology transfer, improve management skill, raise
competitive strength and promote exports as well. Domestic investors could be particularly
encouraged to engage in medium to small industries. Considering location based viabilities of
diverse industries, indigenous investors could be provided extra incentives. All in all,
effectiveness in one window system through better coordination must be there. There is also a
need of institutional support that provides regular feed backs on the changing pattern of market
both internally and externally. Initiatives to promote and expand free economic and export
processing zone must be guided by the aim of importing new technology and retaining high
value added in the country.

Similarly, a robust strategy to convert Nepal into one of the big tourist destination of South Asia
must be there. While doing so, it is necessary that the increased tourist’s requirements and
demands are mainly met through domestic supplies based on a coordinated strategy particularly
with industry and agriculture. In this area also value chain system could be pursued and
encouraged with priority. If such tactics are employed more judiciously, tourism industry would
be one of the key vehicles of self-reliant development.

In Nepal’s context, water resources development could form a very prominent means of self-
reliant development. Needless to add, given the potentials, had Nepal been in a position to export
electricity massively, this would have enhanced Nepal’s bargaining power with least possibility
of trade blockade unilaterally. Making fulfillment of increasing household and industrial demand
as a core of the water resources development strategy, completion of some mega projects at a
faster rate tying with exports could be a better strategy. But instead of pursuing appeasement
approach, national interest and maximization of benefits must be a bottom line. More broadly,
development of alternative energy should be pursued in an integrated way so as to gradually
reduce excessive external dependency for fulfilling rising energy demand.

Along with energy, development of other infrastructures will be crucial for minimizing supply
side bottlenecks which have been the key hindrances to promote investment in the areas of
competitive advantages and augment internal production capacity of the economy. Furthermore,
quality roads and better connectivity in different part of the country including remote areas is
essential for more balanced, equitable and sustainable development. Therefore, state, private
sector and community have to be massively mobilized for that purpose. Apart from public
private partnership, foreign investment in key strategic infrastructures will be advantageous to
augment that course.

A shift in the strategy of financial sector will be required which apart from contributing to
financial deepening could help to minimize the widening imbalances across regions in terms of
access to saving and credit facilities including inclusiveness in financial services. In this respect,
the affordability aspect should be fully considered. Equally important is the need of strategic
shift toward productive investment for contributing to promote growth and expand supply side of
the economy to overcome from the lapses emanating from price and balance of payments
stability centric tactics in the monetarist line. While focusing on the capital market development,
attempts should be made to divest the investment structure at the same time ensuring that share
allocation is also made among the poor and low saving people exclusively. For that, selective
government supportive system could be introduced and enhanced under which payback
mechanism could also be developed. Local resource benefit sharing arrangements and local
ownership right practices encouraged gradually has to be further pushed and institutionalized
replacing adhoc arrangements again ensuring the benefits to the poor and disadvantaged. Today
such a route has been emphasized with priority in many countries to ensure benefits to those who
are deprived of benefits from the market system. For containing unprecedented rise in wealth
inequality also such a strategy is being popularized.

Strategies shaping new external economic and trade relations must be evolved to be compatible
with self-reliant development discourse (i.e. interdependency). For this, new strategies in aid
mobilization particularly from the standpoint of enhancing domestic ownership and raising aid
effectiveness will be necessary. Similarly, the strategies linked to FDI should be guided by the
aim of complementing the resource gap, removing the supply side bottlenecks, maximizing the
benefits of competitive strength, raising productivity through among others technological
advancement and zeroing the external dependency in the long run. Linking FDI with trade, a new
strategy on external trade relations will be required that could diversify trade in terms of
composition and destination.

All in all, unless there is a big push in the level and drastic change in the composition of
investment, sustained high growth and development will be impossible. Needless to add, under
the business as usual assumptions, gross fixed investment has to be raised from present 20 to 21
percent of GDP to around 40 percent of GDP for around 8 percent growth rate. This is most
unlikely at least in the medium term. Therefore, grounded on the strategies of massive efficiency
in factor use and total factor productivity growth, such an annual growth rate will need
accomplishment at least after 3 to 4 years with the gross fixed investment of around 32 to 33
percent of GDP. For this also, a massive expansion in domestic saving from below 10 percent of
GDP of today has to take place especially from the self-reliant development perspectives. It is
ironical that the national saving rate due to massive transfers is in the neighborhood 40 percent.
This means that there is a real problem of transferring such a saving toward productive areas.
Therefore, three to four pronged strategies to overcome the likely widened saving investment gap
will be required. First should be the saving mobilization of households and corporate sector and
channeling it toward productive areas. This has to be followed by a strategic shift in the capital
market to bring about larger population in its net in the line noted above. Second, containing of
public sector recurring expenses is a must for generating saving in the general government and
public enterprises. Third could be the foreign direct investment in which care should be given in
such a way that such inflows besides enhancing internal saving could contribute to augment
supply capacity of the economy markedly overtime. Equally interlinked contributory factor will
be the extent of successes in containing parallel economy in a short span of time. In this respect,
in addition to attracting the remittances inflows through official channel, there is a need of
substantial reduction in production and transaction cost in which worsened governance and
business and entrepreneurial environment is reversed.

Inclusiveness and equity must be embedded in the development strategy. Growth patterns
systematically excluding various disadvantaged socio-economic groups must be corrected. The
exclusiveness and structural disequilibrium in the labor markets with very adverse effect on
income inequality also needs correction. Correcting so called trickledown misconception and
rhetoric; the productive employment should be at the centre of the growth strategy. Needless to
add, this is essential for political stability and social cohesion led sustainable growth and
development. For this, at first, there is a need of shift in growth strategy in which focus should
be on inclusiveness which inter alia demands productive employment centric growth. Hence, it
underscores on the need of encompassing through such a pace and pattern of growth that through
certain distributive relations and institutional structures leads to disproportionate benefits to the
poor and excluded. In other words, it entails equity as well as equality of opportunity in which
access to assets, employment opportunities, markets; resources and unbiased regulatory
environment etc form the integral part it37. Noticeably, it additionally demands that, unlike the
conventional wisdom, an ex-ante rather than ex-post (accidental outcome or benefits) strategic
approach is followed in devising inclusive growth strategy so that the workforce is involved in
both processes and outcomes. This helps to improve the condition of the poor and excluded
leading to increasing their purchasing power and expanding the home market simultaneously.
37
For comparative assessment of inclusive growth with that of Washington Consensus see Filho
(2010).
This has to be accompanied by a strategy of promoting larger investment by a host of scattered
and local small businesses for meeting the expanded market having further second and
subsequent round effect in terms of employment generation, expansion in the home market and
dent on poverty. This is a strategy of growth through redistribution which becomes more
sustained, independent of bubbles and more egalitarian. A complementary strategy to contain
steep rise in inequality would have more positive effect toward that direction. As will be
explained below, such a strategy demands some bold complementary policy measures at the
macroeconomic policy front for more internal autonomy and policy space.

Comprehensive Economic Policy Framework Together with Revamping of Macroeconomic Policy:

Grounded on development strategy, a comprehensive but coherent economic policy framework is
a must. For correcting asymmetries, ensuring intra and inter institutional coordination and
framing and implementing policies in the line consistent with set strategies, economy-wide
policy approach is essential. Based on their potentiality, comparative and competitive strengths
and complementarities role, distinct policies pertaining to production, infrastructure and services
related sectors have to be framed and comprehend in a broad overall setting. In order to prevent
mismatch and unbalances among major broad sectors, identification of supply gaps and
interlinked structural bottlenecks affecting one sector by another is necessary to make policy
corrections across sectors and sub-sectors in a prioritized manner. Based on the experience, more
overhauling approach in the design of policy and implementation in critical areas ranging from
agriculture, industry, tourism, energy, infrastructure to health, education, social security,
employment, poverty will be required grounded on, among others, inclusiveness, equity and
regional balances principles. The ultimate policy discourse should be such that it, unlike the neo-
liberal presumptions, addresses both supply and demand side impediments and constraints
simultaneously. This is why the feature and direction of macroeconomic policy regime becomes
critical and important.

More specifically, macroeconomic policies have to be revamped in a way that by encouraging

primarily speculative and other quick yielding business activities tend to evaporate the
productive system linked to people’s livelihood, wellbeing and sustained development. This
means that macroeconomic policy in countries like Nepal has to play a catalyst role in
minimizing or resolving supply side bottlenecks that constrain accumulation of productive
capital, enhancing productivity of inputs (i.e. land, labour and capital) and augmenting factor
productivity growth as a result of, among others, infrastructural, technological and skill gaps
despite competitive strength in many critical areas. Hence, the policies affecting both state and
private investment level and pattern along with added effect on business and entrepreneurial
environment will be very critical in the days to come. On the other hand, beyond fiscal
consolidation and macroeconomic stability grounded on mechanistic neo-classical approach,
macroeconomic policy affecting demand side through the effect on wages, consumption and
distributional gains will be equally critical in enhancing internal domestic demand led market
expansion, growth and development simultaneously. As such, how to address these two sides
more judiciously should be the major macroeconomic policy concern. This, among others,
demands bringing about compatibility among fiscal, monetary, trade and labor policy policies
considering all these as important ingredients of macroeconomic policy regime. Equally
important is that social aspect is also brought into the trajectory of macroeconomic policy
setting.
Such comprehensiveness is essential from the standpoint of promoting inclusive growth which,
inter alia, embodying equity and sustainability dimension underscores on the need of focusing on
policies that enhance human capabilities, augment employable capacity and quality job. For this,
replacement of pro-cyclical stabilization centric macroeconomic policy by growth friendly
accommodative one will be essential. First of all, such a policy discourse should recognize that
inclusive growth and development is far beyond pro-poor, shared and broad-based growth. It by
taking a long term perspective focuses on productive employment led growth. Needless to add,
rapid and sustained poverty reduction requires inclusive growth that allows people to contribute
to and benefit from economic growth. The ability of individuals to be productively employed
depends on the opportunities to make full use of available resources as the economy evolves over
time.

While pursuing such a changed policy course, it is utmost necessary that a drastic reform in
fiscal policy is carried out. In the public expenditure and management front, the primary focus of
reform should be on containing unproductive expenses, controlling misuse of funds and
enhancing of efficiency in resource use for better outcomes and delivery. This will not be
possible under business as usual resource allocation and public expenditure arrangements which
are driven by more than decade old medium term expenditure framework. A new framework has
to be evolved after intra and inter sectoral restructuring for making it as a new base as the
ongoing framework in the name of fiscal balance and economic stabilization in a priory conceals
or undermines issues associated with resource drain, leakages and budgetary mismanagement. It
is necessary that resource allocation decisions are based on performance budgetary system that
are again rooted in bottom up practices under which efficiency in resource use and better returns
are made the principles. If a policy of shifting or diverting more and more resources to the
productive areas could be ensured by controlling burgeoning recurring expenses, then
accommodative fiscal policy would have more positive stabilization effect in the medium to long
term. Similarly, in the revenue and taxation front, the cascading tariff and revenue structure has
to be changed. The homogeneous tariff structure discouraging high value added or import
substitution industries have to be revamped. This has to be added by expanding tax bases
massively to reduce external trade based revenue dependency and enhancing progressivity in the
tax system.

In the monetary and financial policy front, the monetarism led policy discourse has to be
completely changed in which apart from price and balance of payment stability, growth should
form one of its main objectives which inter alia demands to recognize that supply factors are
more critical in the countries like Nepal. Through institutional and structural reforms more
drastically, the gap between deposit and lending rates has to be narrowed substantially in the
financial sector, while at the same time guarantying affordable credit access to the rural
populous, marginalized and poor people. In doing so, steps to divert more financial resources in
the backward areas through banking system will be essential to avail credit facilities in highly
demanding priority areas. In this new orientation, clear cut policy streamlining micro credit
institutions and cooperatives from the standpoint of boosting their role in mobilizing household
savings and channelizing them toward production, exchange and more equitable distribution will
be needed for bringing about various socio-economic groups in the mainstream of market system
from the grass roots. More broadly, a major policy shift encouraging investment in productive
areas added by a policy of financial inclusion will be required to resolve systemic type problems
in the financial system. Successful country experiences indicate that prevention of excessive
volatility, including volatility resulting from external shocks or imbalances must be there to
insulate the economy from the present volatile global financial system.

A drastic reform in trade policy is urgent. First, it has to be recognized in principle that there is a
need of direction of causality from investment to trade for closer nexus between the two for
enhancing supply side of the economy as a precondition for more exports leading to correction in
unsustainable trade imbalance. Along with identification of more competitive exportable
industries including agro-based, small, medium and large manufactured industries as well as well
services industries more distinctly in a dynamic frame, an integrated and more cohesive export
promoting policy will be required. In this, apart from built in incentive structure, policies
reduction transaction cost through, among others, trade facilitation, reforms in cascading tariff
structure, enhancement of competitive environment and governance system will be necessary.
With high priority, policy should take into account the need of diversification in exports
compositions and destinations in a more accelerated way. The free economic and export
processing zones should be geared toward export promotion through promotion to the supply and
value chains as well. As an offshoot, there is a need of reviewing the exchange rate system. More
particularly, the present pegged exchange rate with India needs reconsideration for correcting the
misalignment in the relative prices which is not only eroding competitiveness of Nepal’s export
trade but also affecting agriculture development and import substituting industrialization.
Successful country experiences show that they have been able to manage the exchange rate to
keep it in line with productivity growth by using stable exchange rate, some form of capital
controls to check volatility and swings in capital flows and growth enhancing monetary policy
leading to high exports in a sustained way.

Very clear cut policy linked to establishment and expansion of production organizations with
their networking at the household production level is necessary which in turn be formed within
value add and supply chain frame. In this policy framework, the skill enhancement, new
technology adoption, infrastructure facilities and entrepreneurship development etc could be
made their integral part. Depending upon the nature of the production organizations, they should
be linked to the exports.

Besides social services like health and education, labour market policy which includes wages and
employment policy should be an integral part of macroeconomic policy setting. The labor policy
has to deal with rising vulnerability in the labor market emanating from informalization, growing
skill mismatches and widening wage gaps among highly professional and semi-skilled and
unskilled workers. A policy of employment guarantee to all should be advanced with focus on
deprived including women and youth in the beginning. This should include enhancement of
employable capability through technical education, skill enhancement and other similar means in
a much more coordinated way for ensuring productive employment. As an offshoot, recognizing
the need of some flexibility in the labor market, a comprehensive social security and protection
policy to the informal workers must be framed and implemented. This is necessary from the
standpoint of promoting labor productivity and enhancing internal demand induced growth as
well.
In general, spatial, regional and area specific policy direction replacing homogeneity biased
assumption will be essential in the process of macroeconomic policy setting. To narrow down
growing inequality at different levels by tapping local resources including natural and financial
resources, skills and human resources also, such an approach is necessary.

An internal ex-ante macroeconomic policy analysis framework to examine the likely

ramifications of alternative macroeconomic policies has to be institutionalized and strengthened
which will help replace externally dictated or internal ad-hoc and customary practices. This will
contribute to identify the systemic problems in advance and bring about policy corrections more
effectively.

Asserting Transit Right, Reaping LDC Facilities and Revamping Economic and Trade Relations:
Whole gamut of economic relations has to be driven by the objective of augmenting self-reliant
development. Concerted efforts should be there to harmonize foreign aid inflows with the
priorities set in the long term vision led development strategy in which assertiveness in
enhancing domestic ownership is required. This additionally needs that aid effectiveness is made
as an integral part of it. Strategically, a balanced approach should be followed while attracting
foreign direction investment in the critical areas. Removing supply side bottlenecks, boosting
production and services sector expansions in the areas of competitive strength and augmentation
of export should form the major basses of such an approach. Deriving lessons of destabilizing
effect of FDI in many countries, such a selective approach is needed. Priority to the investment
by Nepali Diaspora should be there.

In the areas of trade relations, a new but robust strategy comprehending the major challenges
faced by the country is urgent. The focus of relations should be such that it contributes to both
trade creation and diversification in terms of trade composition and destination. Strategies to take
maximum advantages of duty free and quota free trade facilities has to be explored more
vigorously again seeking aid for trade facilities in a more wider and effective way. Needless to
aid transit right and trade facilitation should form the integral part of such a new strategy. For
this more assertiveness in ensuring the transit right and acquiring economically more
advantageous transit route has also to be explored and materialized. The overdependence on
trade with India must be reduced by augmenting trade with China and other SAARC countries.
The alternative port and transit facilities up to Bangbandhu in Bangladesh committed recently by
India if allowed to materialize may be a major boost to that direction. More noticeably, the
transit and transport agreement with China along with other agreements or understandings
including China’s commitment to construct railway up to Lumbini via Kathmandu and Pokhara
could be considered as a major breakthrough toward diversifying trade and enhancing self-reliant
development. Similarly, effective policies to reap the maximum benefits of LDC market
facilities has to be explored and implemented for exports drive to European countries and the
USA.

Enhancing Broad Political Consensus and Coordination on Development Agenda: Still boundary
issue poses some risks at the political front despite enhancing of political stability after the
promulgation and amendment of the New Constitution. Similarly, dissent voices opposing
various other clauses of Constitution also add risks. On the other hand, despite development
paradigm shift agreed in the Constitution, the political trends indicate that there are big
differences about their perception and strategies to be pursued to bring about prosperity in the
country. Amidst this, in a power centric political culture added by likely continuation of social
contradictions in one form or another, the importance of institutionalizing the minimum
consensus among major political forces and different actors in framing long term vision and
evolving suitable development strategies to be consistent with the New Constitution becomes
extremely important. This will ensure the representation of concerns or voices of various socio-
economic groups and enhance policy coordination so as to minimize the risk in a contradiction
prone society and thereby move ahead more decisively with wider support.

Strengthening Institutional Capacity and Overhauling Governance for Better Outcomes, and
Efficient and Effective Delivery: For improved governance, better outcomes and effective delivery,
capacity building of state organs including bureaucratic institutions and institutions responsible
for outcomes and delivery at both centre and other different levels is necessary. Capacity
building of local level institutions will be critical. In the changed context, institutional capacity
of private as well as community organizations will be equally important.

Along with institutional capacity building, breaking or destroying of clientalism and patronage
system added by strengthening of transparency and accountability system is a must for robust
governance and improved delivery system. More effectiveness in controlling corruption or rent
seeking practices has to be there which, despite some bold measures taken often by the anti-
corruption body, has become more rampant and pervasive from centre to the local level. In the
changed political context, very stiff measures to ensure time bound service delivery system at
both central and local level will be required. More decentralized governing system has to be
strengthened in the spirit of federal structure. A countervailing mechanism by activating civil
society organizations to expose misuse of resources and make the responsibility system
accountable at different level will also be needed. At the same time, as various studies indicate,
genuine democracy and robust governance system is possible only in a system where the
political institutions follow democratic practices and develop mechanisms through which voices
of the people including civil society organizations are heard and responded to. Nepal's
experience further demonstrates that political institutions have to be inclusive, transparent and
forward looking for making them compatible with the required changes in the state's governing
structures aimed at economic and social transformation. Corporate governance has also to be an
integral part of governance reform to prevent rising tendency of crony capitalism.

As stated above also, as a part of paradigm shift, participatory development from grass-root is a
must. This will require, among others, strengthening of local governance in which local bodies
would have full control of the budget with power to implement development works
independently. This would require devolution of power and fiscal decentralization in true sense.
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