Economic Models During Political Transitions
a Samriddhi Publication
Economic Models During Political Transitions
Samriddhi is an independent non-partisan,
non-for-profit, reeearch and educational
public policy institute based in Kathma...
Economic Models During Political Transitions
Economic Models During Political Transitions
Introduction to the issue
The people’s movement of April 2006 significantly...
Economic Models During Political Transitions
Economic Models During Political Transitions
large investments during the era were done by Royal family members or peopl...
Economic Models During Political Transitions
profiteering, racketing, nepotism and favoritism. The decade long civil war...
Economic Models During Political Transitions
1960 to 1980, marks the supremacy of public sector’s supremacy. Economic ac...
Economic Models During Political Transitions
Acts were initiated with the objective of making it easier to do business ...
Economic Models During Political Transitions
interventionism, a large public sector, business regulation, and central p...
Economic Models During Political Transitions
Economic Models During Political Transitions
second largest importer of goods in the world. China became the world’s to...
Economic Models During Political Transitions
Economic Models During Political Transitions
those efficient institutional structures which support the growth and expa...
Economic Models During Political Transitions
1.	 Aslund, A., Boone, P., Johnson, S.Fischer, S.,Ickes, B. (19...
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Economic models during political transitions


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What lessons can Nepal derive from the successful transitions of economies around the world? The discussion paper talks about the various political transitions of Nepal and possible economic models.

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Economic models during political transitions

  1. 1. 1 Economic Models During Political Transitions a Samriddhi Publication www.samriddhi.org ECONOMIC MODELS DURING POLITICAL TRANSITIONS JULY 2011 Samriddhi, The Prosperity Foundation DISCUSSION PAPER
  2. 2. 2 Economic Models During Political Transitions
  3. 3. Samriddhi is an independent non-partisan, non-for-profit, reeearch and educational public policy institute based in Kathmandu, Nepal Samriddhi, The Prosperity Foundation P.O. Box : 8973, NPC 678 416 Bhimsengola Marga Minbhawan Kharibot Kathmandu, Nepal Telephone (+977)-1-446-4616 (+977)-1-448-4016 Fax (+977)-1-448-5391 Email info@samriddhi.org Readers are encouraged to quote or reproduce materials from Samriddhi Foundation for their own publications, as long as they are not being sold commercially. As copyright holder, Samriddhi Foundation requests due acknowledgement and a copy of the publication. © Samriddhi, The Prosperity Foundation CONTENTS 1. Introduction to the issue 2. Rationale 3. Status Updates 4. Legal Framework overview 5. Government Initiative and its impact 5.1 Panchayat Era 5.2 Liberalization Era 6. International Experiences 6.1 India 6.2 China 6.3 East European Countries 7. Challenges and Opportunities for Nepal 8. Issues to be Resolved 9. Issues to be further discussed References S 5 5 5 6 8 8 9 10 10 11 13 13 14 14
  4. 4. 4 Economic Models During Political Transitions
  5. 5. 5 Economic Models During Political Transitions Introduction to the issue The people’s movement of April 2006 significantly changed the political and socio-economic landscape of Nepal. Nepal saw a peaceful end of a decade long civil war that claimed more than 13,000 lives and the power structure that had been dominating the political scenario for the past two and a half centuries faced a transition into a new model of various power centers and structures. Issues like ethnic identity, federalism, social justice and inclusion which were ignored hitherto by the mainstream politics have now come into prominence and are currently the major issues of policy debates. Along with these issues, economic models to be followed by the new Nepal and the structure of the Nepalese economy are also under public debate. The constitution assembly has proposed a mixed economic model involving state, cooperatives and the private sector as the major pillars of the economy. The concept has met with criticisms from experts, media and civil society alike. Majority of the criticism is directed toward the vagueness of the model and lack of clarity of the vision. Rather than being based on certain political ideologies or guided by populist ideas, Nepal could learn a lot from countries that have gone through similar phases and form a more practical and efficient economic model. Although, Nepal’s political debates are dominated by the left leaning ideologies and central planning, capitalism and free markets is gaining prominence around the world, especially after the fall of Berlin Wall and Soviet Union. With the breakthrough developments in communication technologies and transportation as well as the information technology, trends of globalization and free trade are spreading rapidly and becoming the norm of life around the world. In this context, the paper examines various economic systems that could be relevant to Nepal’s growth based on its previous experience as well as international examples. Rationale Nepal’s political history has been a very dynamic one since its first taste of freedom in 1951 when the autocratic Rana regime was overthrown. Over the years, many more struggles have taken place to attain a democracy that delivered. In its recent political history, after the People’s Movement in April 2006, century old Monarchy was overthrown to form a Federal Democratic Republic which promised better Nepal for everyone, especially the poor. People’s expectation from the new political changes has grown and everyone is counting on the new system to bring prosperity. Hence, in this context, there is a serious need for the leaders to develop a vision for the economic growth for Nepal. This paper stresses on the need of such vision and also provides perspectives that need to be considered in order to build a solid growth vision for Nepal. The paper builds an analysis on Nepal’s performance in the economic arena in the past from various perspectives, especially the policy component, in order to learn from both the achievements and failures of the previous practices. It also presents examples and brief case studies of countries that have faced comparable, if not similar political and economic situations and have managed to maintain impressive growth. Therefore, as the new constitution is being written, this paper is one of the attempts to build discourse on the economicgrowthofNepal.Thisisverycrucialashistoryhasshownthatifpoliticalchangesarenotcomplimented by economic growth, conflict is inevitable. Status Updates Nepal remains one of the poorest nations in the world with more than one-quarter of its citizens living below the poverty line. The gross domestic product is estimated to be $35.813 billion (IMF, 2010 est.) which makes it the
  6. 6. 6 Economic Models During Political Transitions 102ndlargesteconomyintheworld.Similarly,thepercapitaincomeisabout$1,270(IMF,2010)whichisamong the lowest in the world. Due to continuous political instability, lack of clear economic vision and infrastructure constraints, the economic growth rate has always hovered around 3 – 5 percent. The growth rate for 2010 was estimated to be around 3.5 percent of the GDP (The World Bank, 2010) Agriculture is the most dominant sector of the economy employing more than 70% of the workforce and generating about 33% of the total GDP whereas industries and services account for 15% and 52% of the GDP respectively. Without a significant industrial base and majority of the population dependent on subsistence farming, Nepal’s economy can be categorized as ‘pre-capitalist era economy (CIA, 2003) Among the total workforce of about 18 million, about 46% are unemployed or marginally employed. Severe lack of skilled labor is a major impediment to productivity growth. (CIA,2003) According to the latest Nepal Living Standard Survey, 13 % of the population is still living below the absolute poverty line. Nepal’s economic model so far has been guided by the mixed economic model which as per its proponents combines the best of both worlds i.e. capitalism and communism. However, both Nepal and its neighbor India’s experiments with the mixed economic model for the past half century have failed to deliver the expected growth and development. One of the primary problems inherent in the system as observed in both Nepal and India is the high levels of corruption it invited due to the heavy reliance on politicians and bureaucrats within the system. Despite high hopes and aspirations of the general public and the politicians alike at initial phases, the individual politicians and bureaucrats quickly lost their ability to see the difference between serving their interests and those of the state, as they themselves were the state. This hegemony of the bureaucracy, due to its extensive and invasive rules and regulations, discouraged entrepreneurs from engaging with the state. However, with the people’s movement of 1990, Nepal saw a reemergence of democracy which was later followed by a limited economic liberalization. With the fall of the Berlin Wall and collapse of USSR, the dominating trend of the 1990s was free markets and liberalization. Most of the goods and services traditionally handled by public enterprises are being performed by the private sector now. Privatized enterprises such as Nepal Telecom have seen a huge boost in their performance and service provided after the privatization. Legal Framework Overview Economic growth and models to achieve a certain level of economic prosperity became a national concern only after the overthrow of the century long autocratic family regime of the Ranas in Nepal. From then on, the development of legal framework for economic growth has been directly connected to the political regimes and the orientation of those particular regimes towards economic growth. Through the analysis of acts that guided economic growth in Nepal, it could be said that until the early nineties, Nepal’s economic policies have been inward looking and protectionist. After that, Nepal’s economy became more open and liberal with the legal frameworks created by various policies and acts such as the Industrial Policy 2049 (1992), Foreign Investment and Technology Transfer Act 2049 (1992), Companies Act 2063 (2006) and others. Nepal’s private sector took its first steps in 1951 with the implementation of Companies Act for private limited companies and by mid 1960s over ninety private companies had been established but they remained ineffective in scaling up due to a heavy reliance on the import of resources and too many restrictions on business. The patronizing attitude taken by the Panchayat system towards business and other entrepreneurial activities further degraded the situation of private sector. The state’s dominating attitude resulted in wide spread nepotism and favoritism in awarding business licenses and other government facilities. An evidence of this is that most of the
  7. 7. 7 Economic Models During Political Transitions large investments during the era were done by Royal family members or people with close links with the Royal family. Added to this was the state’s intervention in other private ventures as well. The scenario improved a little after King Birendra came into power and instituted a number of reforms including the Industrial Enterprise Act of 1974, which shifted the government’s emphasis from the public to the private sector as the primary medium for economic growth. Despite these positive changes, King Birendra’s regime also continued to carry the traditional approach to private sector and private sector continued to languish. After the restoration of democracy in 1990, the frameworks for economic reform centered on creating private sectorfriendlyinvestmentalongwithinvitingforeigndirectinvestment.TheForeignInvestmentandTechnology Transfer Act 1992 & Industrial Enterprises Act 1992 provided the necessary policy and legal framework for the promotion of industrial activities in Nepal. The Industrial Enterprises Act was an attempt to encourage industrial production and productivity. The act entailed provisions to allow for subsides to certain priority industries which inculdes tax reductions and excise duty rebates of up to 35% for industries established undeveloped and underdeveloped areas, as well as for export oriented products. The Foreign Investment and Technology Transfer Act 1992 was an attempt to increase Foreign Investment by establishing a conducive environment for the investors to invest. According to the provisions in the act, foreign investors were treated equally as local investors along with ensuring smooth visa provisions where foreign nationals would be granted 6 months non-tourist visa if they wanted to conduct some survey, study or research with the objective of making investment in Nepal. If an investment of a hundred thousand dollar is made at once, such investor along with his dependant family is granted with residential visa until their investments are retained. In practice however, there has been lack of smooth coordination between the Department of Industries and the Immigration Department in executing this policy. According to Rana & Pradhan (2000), Foreign Investment & Technology Transfer Act and Industrial Enterprises Act, provide some fiscal incentives including income tax relief in certain cases. But the amended Revenue Act and New Income Tax Act have withdrawn all such incentives, which is highly controversial. Similarly, Rana & Pradhan (2000) also mention another setback in the implementation of the provision mentioned in the Foreign Investment & Technology Transfer Act saying there is duty draw back facility to those who export their products, but they have to face many difficulties in getting such facility in one hand and even if they get, they get after long gap of time. Some time they are given Government bond instead of cash which may be of no value to the foreign investors. Hence, well intended policies have failed to deliver projected result due to various weaknesses, co-ordination between line ministries being one of them. With the implementation of such free, liberal and market oriented policies in the 90’s, a very encouraging growth had been achieved for a certain number of years. Nepal achieved the record GDP growth rate of 7.9 percent during the years 1993-1994. During this period, the most dominant sector of the economy, agriculture also registered a growth rate of 7.6 percent. Industries like banking, carpets and tourism flourished providing a boost to the economy. According to ILO (2003), the average annual growth rate of GDP increased from 4.8 percent to 5.2 during 1985-1996. Employment and value-addition in the manufacturing sector also grew. Manufacturing employment rose 36 percent in the first few years after the reforms, and the growth rate of manufacturing value added increased from 5.3 percent to 13 percent. Gross national savings improved from around eleven percent to over 16 percent during the decade. However, the growth could not be maintained owing the lack of strong structures to institutionalize the growth and the fact that Nepal was going through the Maoist insurgency. Political instability and uncertainty started with the toppling down of Nepali Congress’s government due to conflict within the party. The temporary tenure of the subsequent governments made them disoriented and weak which in turn promoted corruption,
  8. 8. 8 Economic Models During Political Transitions profiteering, racketing, nepotism and favoritism. The decade long civil war worsened the situation by compelling the government to focus on the insurgency and lose their focus on the economy. Eventually, politics overtook the economy. In analyzing Nepal’s economic trends, it is also important to take into account Nepal’s trading relations with India. According to Rana & Pradhan (2000), the Nepal-India Trade treaty of 1996 also played a major role in attracting joint venture or FDI (specially Indian Investment) in Nepal as it provided free access of Nepalese manufactured products to India without any duty or restrictions. But the revision of treaty in 2000 as put several restrictions along with India fixing the quota to some of the items which had restricted in the volume of export. Quotas fixed to some of the items were very low compared to the capacity installed by the industries. Hence,duetoseveralconstraints,theencouraginggrowthtrendsshowninearlyninetiescouldnotbemaintained. According to ILO (2003), GDP recorded a negative growth of 0.63 percent in the year 2001/02 and manufacturing employment declined about 19 percent. IntherecentturnofeventsinNepal,withtheoverthrowoftheMonarchyandthedraftingofthenewconstitution, Nepal is currently guided by the Interim Constitution, 2063. The constitution that is being drafted currently will be laying down the basic structure of Nepal as a federal nation and hence, it is necessary for the vision for the model of the economy to be clear. Major portion of policy level debate is focused on the political agendas and serious discussion on Nepal’s economic model is limited. Recent news point out that the government is inclined to adopt a mixed economy system introducing cooperatives as the third economic pillar after the public and private sectors. However, there is no detailed plan for economic growth on the policy level yet. Government initiative and its impact Since 1956, Nepal has so far implemented ten five –year plans with disappointing results. Five-Year Plans of Nepal generally strove to increase output and employment; develop the infrastructure; attain economic stability; promote industry, commerce, and international trade; establish administrative and public service institutions to support economic development; and introduce labor-intensive production techniques to alleviate underemployment. The social goals of the plans were improving health and education as well as encouraging equitable income distribution. Although each plan had different development priorities, the allocation of resources did not always reflect these priorities. The first four plans concentrated on infrastructure—to make it possible to facilitate the movement of goods and services—and to increase the size of the market. Each of the five-year plans depended heavily on foreign assistance in the forms of grants and loans. These plans were based on top down approach and most of the plans of local bodies were guided or influenced by the national level bodies. As observed around the world, centrally planned economies or government programs fail invariably. Panchayat Era (1961-1990) The panchayat system which was introduced in Nepal in 1961after the democractically elected government was thrown off by a royal coup lasted for about three decades. The economic policy regime during this period is characterized by a protectionist industrial investment scenario which was regulated by means of a rigorous licensing system. Only large business houses and people with connection to the royal family were awarded licenses. In Nepal, the Company Act of 1936 and the Industrial Policy of 1957 both were inward looking and focused on import substitution and self-reliance. Thus in Nepalese history of industrialization the three decades, from
  9. 9. 9 Economic Models During Political Transitions 1960 to 1980, marks the supremacy of public sector’s supremacy. Economic activities were protected by license system, protection was given to public entities, foreign investment were restricted and government shouldered the responsibility of providing goods and services to its citizens like shoes, cement, drinking water, electricity, roads, medical care and so on. Therefore, a huge number of State Owned Enterprises were established during that time with the objective of promoting industrialization, creating employment opportunities and generating revenue for the government. However, the fulfillment of all the three objectives can be questioned. The financial burden on the government had been increasing and the state owned enterprises (SOEs) were not performing well to promote growth in the country. Even today, more than half of the 36 public enterprises that we have now are operating under losses and the amount of accumulated loss is alarming. Except for a few of them, public enterprises are epitome of corruption, inefficiency and financial disasters. More than 30 percent of the government’s initial investment of 86 billion rupees has already been lost. In the fiscal year 065/066 alone, only 4 of the public enterprises paid dividend of Rs. 3 billion and 470 millions to the government which is just about 4.3 percent return on the investment. Some of the public enterprises have even negative net worth owing to the continuous losses over a long period of time. (MoF, 2011) Liberalization Era (Mid 1980s to Late 1990s) Since mid-1980s The Nepalese government, with the help from multilateral agencies like the IMF and the World Bank, embarked on the path of liberalization and privatization. However, due to the various structural constraints the government could not successfully implement privatization policy during the Seventh Five-Year Plan (1985- 1990). The government that came into the power after the people’s movement in 1990 initiated the implementation by publishing a white paper on privatization in 1991. Despite frequent changes in the government and major slow down of the process at certain times, the privatization process of Nepal has continued. By 2008, Nepal had privatized 30 public enterprises and 36 more are still being owned and run by the government. (MoF, 2011) Privatization Act of 1994 has stated the following in its preamble: Whereas, in order to increase the productivity through enhancement of efficiency of the state owned enterprises of the Kingdom of Nepal, and thereby, mitigate the financial administrative burden to the Government, and to usher in all round economic development of the country by broadening the participation of private sector in the operation of such enterprises, it is expedient in the national interest to privatize such enterprises and to make arrangements therefore. By the same act, the government has also formed a Privatization Cell at the Ministry of Finance which is responsible for organizing the privatization process. The government has also made exchange rates market- responsive and commercial banks are allowed to set their own interest rates. The government’s thrust in this period had been towards a new trend of liberalized economy giving major roles to the private sectors in the industrial as well as service sector. Following the liberalization measures of the government, manufacturing industry in Nepal has pursued an outward oriented liberal development strategy since mid-1980s. Ensuing structural changes and competition resulted in increased share of output share of export-oriented industries from 13% in mid 1980s to 28% in 1993/94 while the output share of import substitution industries fell from 87% to 72% in the same period. (Sharma K, 2000) Nepali Congress which had won a comprehensive victory in the 1991 election instituted some sweeping reforms. It set forth the Industrial Policy 1992 as a program statement and passed the Foreign Investment and One- Window Policy, the Industrial Act 1992, and the Foreign Investment and Technology Transfer Act 1992. These
  10. 10. 10 Economic Models During Political Transitions Acts were initiated with the objective of making it easier to do business in Nepal by removing hurdles to starting businesses and encouraging investment by both foreign and local investors. Other sectors such as taxation, foreign currency controls, and import restrictions were also reformed to accommodate private sector better. The limited liberalization had its most visible effect on the financial sector of the economy. Numerous commercial banks have been running their operations and the competition can be described as no less than cut throat. Latest banking technologies and services at competitive prices are now available to Nepalese citizens although these financial institutions are yet to reach the rural and less accessible areas of the country. The years 1993-1994 remain the most glorious days of Nepalese economy. Nepal achieved a GDP growth rate of 7.9 that year. Agriculture, the most dominant sector of the economy also registered a growth rate of 7.6 that year. Industries like banking, carpets and tourism flourished providing a boost to the economy. However, political instability and uncertainty started with the toppling down of Nepali Congress’s government due to infighting within the party. The temporary tenure of the subsequent governments made them disoriented and weak which in turn promoted corruption, profiteering, racketing, nepotism and favoritism. The decade long civil war worsened the situation by compelling the government to focus on the insurgency and lose their focus on the economy. Eventually, politics overtook the economy and Nepal is back into the stagnant and even worsening economic situation. Despite this, the absolute poverty rates of Nepal have gone down significantly. The absolute poverty rates which had been 42% in FY95/96 has declined to 13% in FY 11/12 as indicated by the Nepal Living Standard Survey. Following table shows the GDP of Nepal from 1960s to 2000: $12 B $10 B $8 B $6 B $4 B $2 B $0 19651960 1970 1975 1980 1985 1990 1995 2000 2005 2009 Nepal $12.531 Billion 2009 Source: Data- World Bank Chart: Google Maps International Experiences India After its independence from Britain in 1947, India adhered to a highly regulated mixed economic model until 1990s. The then Prime Minister of India, Jawaharlal Nehru’s impression of Soviet styled central planning prompted Jawaharlal Nehru to structure the Indian economy in similar way to that of USSR. Domestic policy tended towards protectionism, with a strong emphasis on import substitution industrialization, economic
  11. 11. 11 Economic Models During Political Transitions interventionism, a large public sector, business regulation, and central planning. They expected favorable outcomes from their strategy, involving the rapid development of heavy industry by both public and private sectors, and based on direct and indirect state intervention, rather than the more extreme Soviet-style central command system. However, the four decades of this economic model gave India a mere average growth rate of 3.5%whichwassarcasticallycalled“theHindurateofgrowth”. TheIndianeconomywassoheavilyregulatedthat Rajagopalachari, one of the prominent leaders of the Indian Independence Movement called the era “License- permit-raid raaj”. By the end of four decades of this regulated economy, India was almost bankrupt and a home to millions of people living under abject poverty. This state of affairs along with pressure from international agencies like World Bank and International Monetary Fund forced India to revisit its economic model. Minister Narasimha Rao, along with his finance minister Manmohan Singh, initiated the economic reforms of 1991. The reforms did away with the License Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Since then, the overall thrust of liberalization has remained the same, although no government has tried to take on powerful lobbies such as trade unions and farmers, on contentious issues such as reforming labor laws and reducing agricultural subsidies. Bytheturnofthe20thcentury,Indiahadprogressedtowardsafree-marketeconomy,withasubstantialreduction in state control of the economy and increased financial liberalization. This has been accompanied by increases in life expectancy, literacy rates and food security, although the beneficiaries have largely been urban residents. Last year, Indian economy grew by 8.20 percent making it one of the fastest growing economies in the world. Following figure shows the growth of India’s Gross Domestic Product from 1950s to 2010: Source: Wikipedia Chart based on publicly available data China Since the political upheavals of 1949, China followed a centrally planned heavy industry development strategy akin to United Soviet Socialist Republics during 1920s and 1930s. Consumption was reduced while rapid industrialization was given high priority. The government took control of a large part of the economy and redirected resources into building new factories. India-Gross Domestic Product GDP(inMillionsofindianrupees) 80,000,000 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
  12. 12. 12 Economic Models During Political Transitions Entirelynewindustrieswerecreatedbythegovernment.Economicgrowthjump-startedbuttheeconomylargely stagnated and was disrupted by the Great Leap Forward famine which killed between 30 and 40 million people. The purges of the Cultural Revolution further disrupted the economy. Urban Chinese citizens experienced virtually no increase in living standards from 1957 onwards, and rural Chinese had no better living standards in the 1970s than the 1930s. The economic performance of China was poor in comparison with other East Asian countries, such as Japan, South Korea, and even Taiwan. Chinese economy in this period was full of huge inefficiencies and mal investments. With Mao’s death, the Communist Party of China (CPC) leadership turned to market-oriented reforms to save the failing economy. Deng Xiao Peng, who came into power after Mao guided and directed significant economic reforms in China. Since 1978, China began to make major reforms to its economy. A decision was made to permit foreign direct investment in several small “special economic zones” along the coast. The reforms decentralized the state economy by replacing central planning with market forces, breaking down the collective farms and getting rid of state-run enterprises. One of the most successful reforms—the “within” and “without” production plans— allowed businesses to pursue their own aims after the met their state-set quotas. Enterprises and factories were allowed to keep profits, use merit pay and offer bonuses and other incentives, which greatly boosted productivity. There was a shift from central planning and reliance on heavy industry to consumer-oriented industries and reliance on foreign trade and investment. The 1978 reforms included efforts to boost foreign trade through the establishment of 12 state companies to control imports and exports and the creation of Special Economic Zones (SEZs) along China’s southern coastline. In 1982, communes began to be dismantled and peasants were allowed to grow and sell products. In 1985, tariffs were cut from 56 percent to 43 percent beginning the long, gradual reduction of import barriers. (Park, 1997) Following chart shows the GDP growth of People’s Republic of China between 1952 to 2005: Source: Wikipedia Chart based on publicly available data Currently China is the world’s second largest economy after the United States. It is the world’s fastest-growing major economy, with average growth rates of 10% for the past 30 years. China is also the largest exporter and People’s Republic of China’s Nominal Gross Domestic Product (GDP) Between 1952 to 2005 FDP(inbillionsofRMByuan) 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 Korean war Great Leap Forward Cultural Revolution Market-based economic reforms since 1978 18232.1 billion in 2005 Year Shenzhen SEZ 1997 Asian Financial Crisis Shanghai SEZ WTO entry Farm Privatization 67.9 billion in 1952
  13. 13. 13 Economic Models During Political Transitions second largest importer of goods in the world. China became the world’s top manufacturer in 2011, surpassing the United States. The per capita GDP of China currently is $7,518 (PPP) which makes it 93rd country with highest per capita GDP in the world. (Right to Say, 2011). Despite the huge economic growth, poverty is still prevalent in the rural areas of China. East European Countries East European countries which split from Russia after the collapse of communism in 1989 provide a good example of economic transitions. Between1989 and 1991 the collapse of communism in Soviet bloc brought down the similar political systems in its constituent countries. With the rapid decline of the communist party’s power throughout the region, and particularly following the collapse of the Soviet Union, it proved impossible to maintain an economic system based on hierarchical subordination, predominant state ownership, and a command-rationing allocation previously communist-controlled countries therefore inherited both an economic system that no longer functioned properly and a political struggle for power. (Aslund, A, 1996) Thesecountrieschosedifferentmodelstostructuretheirneweconomy.Somecountriesoptedfordemocratization, and initially had liberal governments which opted for radical stabilization and liberalization. Countries opting for this were Poland, Czechoslovakia , Estonia , Latvia , and Albania . Each of these countries saw a peak in inflation in the first year of reforms which was brought down to under 50 percent in the ensuing years. The second group of countries had democratic regimes and initially non-socialist governments but chose, or ended up with, slower or less radical reform. Hungary, Lithuania, Bulgaria, Russia, and the Kyrgyz Republic were in this group. This group of countries made the reforms very gradual and in some cases postponed them. The economic growth in this group of countries has been slower as compared to the previous group. One of the reasons for this was the incomplete reforms which resulted in backlash against the new government and economic sustem. Challenges and Opportunities for Nepal With the population exceeding 30 million and ever-present low economic growth rates, Nepal faces a number of challenges in its attempt to achieve prosperity and higher living standards for its citizens. Political instability and confusion, economy’s increasing dependence on remittance incomes, low investment rates and investment unfriendly environment, closure of major industries, energy crisis are some of the major obstacles in the road of Nepal’s economic growth. Presence of cartels and syndicates in almost every sector of the economy and domination of economic activities by a few large business houses present additional major obstacles to growth and implementation of a growth friendly economic model. Lack of equal liberalization among the different sectors of the economy has undermined the benefits of the liberalization measures taken by the government in early 1990s. Yet, Nepal also has numerous opportunities especially with its abundant natural resources and potential for hydro power, tourism industry and inexpensive human resources. Its geographic position as a “transit economy” between India and China, two of the fastest growing and most populous economies in the world provides Nepal with immense opportunities if it can utilize them. As India and China are growing at extremely high rates and have been forecasted to grow at the similar rates for a extended period of time, even the spillover effects from these countries could create thousands of jobs for Nepalese citizens and encourage growth in Nepal. Besides this, with the newly created affluence the number of Chinese and Indian tourists visiting foreign countries is also increasing rapidly. Nepal could have its tourism industry boosted by bringing in these tourists.
  14. 14. 14 Economic Models During Political Transitions NepalisalsoamongthefewLDCswhoaremembersofWorldTradeOrganization.Nepalgotthemembershipon 23 April 2004 through the negotiation process. Membership of WTO could be a boon or a curse based on how Nepal handles the new avenues opened up by the membership. Being a LDC member, Nepal has a substantial advantageintheagriculturesector.Hugedomesticandexportsubsidiesinthedevelopedcountrieshavedistorted international trade in agriculture. However, WTO member organizations have agreed to the parallel elimination of all forms of export subsidies in agriculture and disciplines on all export measures by the end of 2013. This provides a huge opportunity for agricultural countries like Nepal to get better value for their products and increase their exports. Nepalese exports of agriculture products are concentrated in few products and also in few countries. The major market for vegetable fats, wheat, lentils, cardamom, oil seeds is India whereas the major market for sugar is Europe. (Department of Customs 2003) Nepal could also benefit from numerous opportunities brought about by globalization. With the rapid spread of globalization and decrease in communication and transportation costs, labor intensive as well as IT related jobs are being transferred to developing and least developed countries. India’s IT revolution is one of such examples. Nepal with right policies and infrastructures could benefit from outsourcing and off-shoring jobs too. Issues to be resolved Nepal is currently struggling to define development model under the federal governance structure and to find out the correlation between the political instability and growth. Nepal’s past experience of shifting from one economic model to another economic model hasn’t been without obstacles. Broader acceptance of the economic model is necessary if the model is to sustain and deliver economic growth. The liberalization attempts of early 1990s failed to garner broader acceptance from public, civil society and political parties themselves although liberalization is the prevailing trend around the world. The then government’s inability to communicate the importance and rationale of the measures taken by it, lack of institutional support required for a liberal economic model such as efficient and impartial justice administration, equal access of population to economic activities of all the major sectors, secure and strong property rights, easy access to credit undermined the importance of liberalization which resulted in backlash against the economic model. While determining the new economic model for the country, the issue of its broader acceptance and support from all the concerned stakeholders should be resolved beforehand. Political instability and ideological differences have been observed as major obstacles to sustainability of an economic model in Nepal. Formulating an agreed upon economic model by all the concerned parties and detaching economic plans and policies from the influence of ruling political parties is another issue that needs to be thought of thoroughly. Issue To Be Further Discussed While people from all sections of the society, along with leaders from different political groups agree on the need for economic growth, agreement on a growth vision has been an elusive quest so far. Economic growth requires a prudent growth vision, realistic plans and disciplined implementation. As presented in this report, the first few years of liberalization of the markets had been really promising for Nepal when it had achieved record growth rates. However, the liberalization process was not followed by proper institutional support and hence the growth could not be sustained. Therefore, one of the primary issues that needs a lot of discussion is creating
  15. 15. 15 Economic Models During Political Transitions those efficient institutional structures which support the growth and expansion of markets. For e.g. the Foreign Direct Investment and Technology Transfer Act, 1992 was an attempt to encourage foreign direct investment in Nepal. However, without efficient legal system for contract enforcement, maintaining a competitive market and other provisions that are necessary for the free flow of markets, the intentions cannot materialize. Hence, these issues have to discussed in detail. Similarly, many countries as explained in the international example on this paper had chosen different models to structure their new economy. Countries like Poland, Czechoslovakia, Estonia, Latvia, and Albania brought about radical reforms and stabilized their economy slowly. These countries saw a peak in inflation in the first year of reforms. Radical reforms bring about such radical results for a while including unemployment. However, it is also important to note that due to those very radical reforms, the countries were able to prosper despite facing initial years of slump. On the other hand, the second group of countries opted for slower or less radical reform. Countries like Hungary, Lithuania, Bulgaria, Russia, and the Kyrgyz Republic made gradual reforms and hence, their growth has been slower as compared to those countries which chose radical reforms. Hence, the issue of which way to choose is a crucial one for Nepal. Choosing the former might requires provisions for safety nets and other precautionary measures whereas choosing the latter requires a long term vision for growth. No matter what economic model is opted, one of the very important aspects of economic growth for a country is that the growth model must have support from the stakeholders. Without popular support, the desired growth cannot be achieved and the international examples also demonstrate that fact. Hence, strategies to receive such support from a range of stakeholders are some issues of further discussion.
  16. 16. 16 Economic Models During Political Transitions References 1. Aslund, A., Boone, P., Johnson, S.Fischer, S.,Ickes, B. (1996). How to Stabilize: Lessons from Post-Communist Countries . Brookings Papers on Economic Activity , Vol. 1996, No. 1. pp. 217-313. 2. ILO (2003, September). A Report on Micro and Small Enterprise Policy Review in Nepal. Retrieved from http://www.ilo.org/wcmsp5/groups/public/@asia/@ro-bangkok/@ilo-kathmandu/documents/ publication/wcms_116688.pdf 3. Rana, M., Pradhan, S. (2005, August). Economic Policy Network Policy Paper 1, Implementation Evaluation Of Foreign Direct Investment Policy In Nepal. Retrieved from http://www.mof.gov.np/economic_policy/pdf/ Implementation_Evaluation.pdf 4. IMF(2010, April). Report for Selected countries and subjects. Retrieved from http://www.imf.org/external/pubs/ ft/weo/2011/01/weodata/weorept.aspx?sy=2008&ey=2011&scsm=1&ssd=1&sort=country&ds=.&br=1&c=558 &s=NGDPD%2CNGDPDPC%2CPPPGDP%2CPPPPC%2CLP&grp=0&a=&pr.x=28&pr.y=15 5. Park, Jung-Dong (1997). The Special Economic Zones of China and Their Impact on Its Economic Development. Greenwood Press. 6. The Worls Bank(2010). 2010 Nepal Economic Update. Retrieved from http://www.imf.org/external/pubs/ft/ weo/2011/01/weodata/weorept.aspx?sy=2008&ey=2011&scsm=1&ssd=1&sort=country&ds=.&br=1&c=558&s =NGDPD%2CNGDPDPC%2CPPPGDP%2CPPPPC%2CLP&grp=0&a=&pr.x=28&pr.y=15 7. Ministry of Finance(2011). Privatization Cell. Retrieved from http://www.privat.gov.np/public_ent.htm 8. Right to Say(2011, April 30). Top 10 nations with the highest per capita income. Retrieved from http://righttosay. com/top-10-nations-with-the-highest-per-capita-income