IPRAD Understanding Understanding Reforms in Nepal Reforms in Nepal POLITICAL ECONOMY AND INSTITUTIONAL PERSPECTIVE : Political Economy and Institutional Perspective Dilli Raj Khanal Pushpa Raj Rajkarnikar Keshav Prasad Acharya Dilli Ram Upreti Institute for Policy Research and Development About the Authors Dilli Raj Khanal, Founder Chairman of IPRAD, is a well-known economist with specialization in Macroeconomics and public policy. After beginning professional career as a teacher at Bhaktapur Campus in 1977, he worked in National Planning Commission for some years. He received PhD in economics from the University of Rajasthan, Jaipur, India. He has been engaged in research and policy analysis for the last twenty-five years. He has worked as national as well as international consultant for many international organizations. He is author of the book Public Expenditure in Nepal: Growth, Pattern and Impact (Published by Sterling Publishers, New Delhi). He is co-author of Macroeconomic Policies, Shocks and Poverty Reduction in Nepal (Published by IPRAD); Financing Public Sector Development Expenditure in Selected Countries: Nepal (Published by Asian Development Bank); A Macroeconomic Model of Nepal in SAARC LINK (Published by Asia and Pacific Development Centre–APDC); Applications, Issues and Future Prospects of Quantitative Tools in Economic Planning: Nepalese Experience (Published by United Nations Centre for Regional Development); Macroeconomic Modelling in Nepal: Issues, Approaches, Relevance and Uses (Published by ESCAP) and Development Planning in Nepal (Published by APDC) among others. Several articles have also been published in Nepal and abroad. He has made pioneering contribution to the macro and input-output modelling in Nepal. He was instrumental in constructing the 39 x 39 input-output table for Nepal, which has been used for long-term forecasting and policy simulation exercises. He became a member of the National Planning Commission in 1994 and 1996. He was member of the last dissolved lower house of parliament. His recent research works are focused mainly on political economy and institutional issues. He has travelled abroad extensively in connection with research work and paper presentation on contemporary economic issues. Continued on Back Flap Understanding Reforms in Nepal POLITICAL ECONOMY AND INSTITUTIONAL PERSPECTIVE Dilli Raj Khanal, Ph.D. Pushpa Raj Rajkarnikar, Ph.D. Keshav Prasad Acharya Dilli Ram Upreti Institute for Policy Research and Development 2005 IIPRA_book_Front1.inddPRA_book_Front1.indd i 99/11/2005/11/2005 112:25:212:25:21 PMPM ii Understanding Reforms in Nepal: Political Economy and Institutional Perspective Copyright: IPRAD, 2005 This publication is copyrighted. However, the materials in this publication may be reproduced in whole or in part, or in any form, for education or non-profit purposes without permission subject to acknowledgement of the source. IPRAD would appreciate a copy of any publication which uses this publication as a source. No use of this publication may be made for resale or other commercial purposes without prior written permission of IPRAD. Citation: Khanal, D.R.; P.R. Rajkarnikar; K.P. Acharya and D.R. Upreti (2005). Understanding Reforms in Nepal: Political Economy and Institutional Perspective. Institute for Policy Research and Development, Kathmandu, xiv + 194 pp. Published by: Institute for Policy Research and Development (IPRAD) Maitighar, Kathmandu P. O . B o x : 8975 EPC 994 Phone: +977-1-4262868 Email: [email protected] Price NRs. 325.00 Design and Print Production: wwps, tel 5550289 ISBN: 99946-808-1-1 IIPRA_book_Front1.inddPRA_book_Front1.indd iiii 99/11/2005/11/2005 112:25:242:25:24 PMPM Preface At a time when the world was entering into the twenty-first century, profound changes were underway in the sphere of economic policy making at both global and national levels. It was already established that an import substitution oriented development strategy implying a proactive role for the government could wreak disaster from the point of view of both sustained growth and poverty reduction. Many developing countries that had pursued such a strategy failed to overcome underdevelopment. Collapse of the socialist system in the former Soviet Union reinforced this. Similarly, predominance of neoclassical thinking in economic policy making was also threatened and put under constant scrutiny in the aftermath of the East Asian crisis of 1997 and failure of the Washington Consensus. In the meantime, the widening gap between the haves and have-nots in many poor countries was generating anger and resentment among the toiling masses of the world leading to world-wide anti-globalisation protests in general and denouncement of the existing practices and policies of the multilateral agencies in particular. The economic miracle accomplished by the East and South East Asian nations in the post-independent period through private sector led and outward oriented growth and development had inspired many countries to follow a similar development model. The multilateral donor agencies were also prescribing a similar development paradigm for other developing countries through programmes aimed at economic stabilisation and structural adjustment from the beginning of the early 1970s in the aftermath of the first oil crisis. Economic liberalisation and globalisation was further accentuated in the developing countries with launching of the Enhanced Structural Adjustment Programme in the early 1990s. The process gained momentum after the establishment of WTO in 1995. However, the serious and unforeseen economic crisis in the East Asian countries and their contagion in 1997 compelled many development thinkers to review the development paradigm dominated by the neo- IIPRA_book_Front1.inddPRA_book_Front1.indd iiiiii 99/11/2005/11/2005 112:25:252:25:25 PMPM iv Understanding Reforms in Nepal: Political Economy and Institutional Perspective classical thinking. Failure of the Washington Consensus also underlined the need for such a review. These developments compelled bringing back aspects of institutions and political economy in the orbit of economic reforms and their processes although, unlike in the past, on different footings and perspectives. It is worth noting that Gunnar Myrdal in his Asian Drama had very strongly advocated the necessity of adopting a broad institutional approach for the development of Asian countries. He had criticised the theories that were ignoring attitudes, cultures and institutions. Myrdal argued that opportunistic stances and political compromises of the ruling elites comprising powerful proprietor classes tended to perpetuate inequalities in the underdeveloped countries in order to remain in power were inimical for change. In recent years institutional economics has been advanced in the writings of Douglas North and others in which they argue that institutions are critical in improving economic performance as they determine the incentive structure and economic efficiency. The new institutional approach advanced in recent years is radically different from both neoclassical economics and traditional development economics. Adherents of the former have implicitly assumed that institutions (economic as well as political) do not matter and that the static analysis embodied in allocative efficiency should be the guide to policy, that is, getting the price right by eliminating exchange and price controls. Similarly, development economists have treated the state as either exogenous or as a benevolent actor in development. Both these extreme lines of thinking have now been found to be deficient in addressing the complex processes of evolving policy reforms, in really helping to resolve economic crises, and in fostering socio-economic development. It is now increasingly recognised that a successful development policy internalizes the dynamics of economic change within the framework of analysis so as to ensure better attainment of the desired consequences. By the same token, the dynamic model of economic change incorporates as an integral part analysis of the polity since it is the polity that specifies and enforces rules. Indeed, it was against this background that the concept of PRSP was advanced in the late 1990s by the World Bank and the IMF in which, unlike in the past, priority is given on internalisation of ownership of policies and programmes in the developing countries. The PRSP demands that a regular mechanism is developed for ex-ante poverty impact assessment of macroeconomic polices in order to ensure that the poor and other most vulnerable socio-economic groups of the society are not adversely affected in the reform process. This latter aspect is closely associated IIPRA_book_Front1.inddPRA_book_Front1.indd iivv 99/11/2005/11/2005 112:25:252:25:25 PMPM Understanding Reforms in Nepal: Political Economy and Institutional Perspective v with both politics and economics. On the whole, the PRSP approach and MDGs demand building institutional and politico-economic issues in the policy making exercise if sustained growth and poverty reduction are to be accomplished within a stipulated timeframe. However, to what extent they are being operationalised at the practical level in countries like Nepal is yet to be verified and substantiated. It has now been recognised that a well-run civil service and an efficient judiciary are pre-requisites for enhancing the efficiency of government institutions and ensuring better outcomes and delivery of economic reforms. Reforms are also