20 years later...

The Economist magazine recently published an article on Japan’s two “lost” decades of economic stagnation and the title of the article was aptly named “To lose one decade may be misfortune…” After growing at a blistering pace from 1960’s to 1980’s, Japanese economy has been languishing for the last two decades and, according to the Economist’s article, in the third quarter of 2009 nominal GDP of Japan – until recently the second largest economy in the world – sank below its level in 1992, reinforcing the impression of not one but two lost decades in the land of Samurai. While Nepal’s economy might not be significant to get Economist’s attention, anyone who is following the Nepalese economy can rightly argue that Nepal also had its two lost decade – from 1990 to 2009.

India and Nepal started the economic liberalization programs around the same time in the early 1990’s. While the reasons behind the path towards economic liberalization in these two South Asian neighbors may have been different – India decided to open up its economy after facing a severe Balance of Payment (BOP) crisis in 1991 while Nepal embraced economic reforms as a part of change agenda of newly elected democratic government after abolishment of Panchayat regime – the motive behind the economic reforms program were same: to push the respective economies towards higher growth and ensure long lasting economic prosperity. 20 years later, the difference is palpable to everyone. While the continuity of economic reforms program started by then Indian Finance Minister Dr. Manmohan Singh in 1991 have paid rich dividends in terms of higher Indian economic growth for the last two decades, discontinuity of reforms agenda brought forward by then Finance Minister Mr. Mahesh Acharya, coupled with political instability and lack of rule of law, have brought Nepalese economy to a point of collapse. Because of its economic transformation during last two decades, India is now in the global radar, Indian companies are in global stage and CEOs of Indian companies are involved in major global business deals. Though at times reforms have been slow because of the coalition nature of recent Indian government set ups, the piecemeal approach to economic reforms have however provided much needed macroeconomic stability and shielded the economy from any undue shocks of sudden liberalization.

Ours, however, is a complete different story. What failed and divisive politics, political instability, and lack of strong rule of law can do to a country’s economy is evident from the current economic misery of Nepal. The failed and divisive politics of the last 20 years has taken its economic toll. After the restoration of the democracy in 1990, there were a lot of aspirations from the general public that political change would lead to economic prosperity. The economic liberalization programs initiated by the then Finance Minister Mr. Mahesh Acharya in 1991 under the Nepali Congress government paid dividends in terms of higher economic growth for ensuing couple of years. As a part of the economic reform process under the tenure of Mr. Acharya, financial sector was liberalized and privatization programs initiated during Panchayat regime supported under World Bank’s Structural Adjustment Program were expedited. These reform agendas were a boarder part of newly elected Nepali Congress government to liberalize the economy and propel it towards higher growth trajectory. As a result of these initiatives Nepalese economy expanded by 8% in 1994 – one of the highest recorded period of economic growth in the country.

However, after the collapse of Nepali Congress government in 1994 these reform agendas were not pushed forward. Moreover, infighting among political parties as well as politicians within a same party for power forced economic agenda to the backseat. The lust for power among political parties has made Nepal one of the most politically instable countries in the World. During the last twenty years, we have had more than 17 government changes. Over 60% of respondents to the recent enterprise survey of Nepalese industries for 2009 conducted by the International Finance Corporation (IFC) have identified political instability as the major obstacle to their business.

It’s a no brainer that political stability facilitates economic growth. Political stability in terms of longevity of government and less political wrangling provides continuation of economic policies. When business community is aware of the fact that a particular government can last for a fixed period of time, they can plan and invest accordingly. They feel assured that, due to the continuation of policies, their investment won’t be at risk because of sudden change in economic policies due to change in national government. However, when there is uncertainty regarding whether a certain government can last or not, businessmen generally prefer to wait and watch. This results in lack of investments and other business activities and stifles economic growth. For example, after the Congress led United Progressive Alliance (UPA) got a majority in the recent national election in India in May 2009, the Indian stock market erupted and SENSEX jumped by more than 2000 points in a single day. Though, the Indian business community generally favors the more market friendly Bharatiya Janta Party (BJP) because of the historical socialist tendencies of the Indian Congress party, the market still reacted positively because they had been afraid of long run negative implications of political instability resulting from hung parliament.

Currently, Nepalese economy is in dire straits. The banking sector is facing acute liquidity crisis, remittance growth – a major saving grace to domestic economy over the last decade – is plateauing, trade deficit is rising exponentially, foreign exchange reserves are depleting, Balance of Payment (BOP) is in record deficit, manufacturing sector is declining, agriculture sector is stagnating, inflation is high, and the list goes on and on. The current economic mess is largely due to political instability and myopic economic policies of respective past governments. From the last 20 years, it’s evident that discontinuity of liberal economic reforms as well as incoherency in economic policy due to frequent changes in government leadership has stifled country’s economic potential. Unless the political parties and leaders get their act together, the basic reasons behind the current economic stagflation will persist. The bottom line is there won’t be any economic prosperity without political stability.

(This article was first published on Evolution - A 17th anniversary supplementary issue of The Kathmandu Post on Feb 19th 2010)