Political feuding between key political parties has stalled several legislations on reforms at Constitution Assembly. The agreements made on trade and investments with global organizations and several other sub-regional and regional groupings have also been halted with similar fate. In addition, Nepal survives through the continuation of macroeconomic difficulties, virtual blackout in governments’ visibility in pursuing nations’ priority agenda, and institutionalization of reinforcing party-specific and unfounded development models in policy making.
Nepal confronts unique policy dilemma. How would we define the situation when there is a guarantee of financial availability but priority projects do not get implemented? How does one respond to the fact that the increasing vulnerability is more prone to the changes, which happen too often, in the key official posts and personnel rather than delayed decision and even weaker design for implementation? The fact that the macroeconomic stability was fairly maintained during relatively peaceful pre-conflict and during the conflict period compared to the post-Peace Accord with Maoists in 2006 is unexplainable. The indirect cost of such anomaly should be higher than the direct socio-economic and political cost.
These realities lead me to few question: Are we going to reinvent economic model for new Nepal? Are we thinking to restructure the existing policy or opting for readjusting the economy’s fault lines? Are we prepared for making ad hoc policy decisions on if-and-when-needed basis? I do not think we are clear about the inconsistencies and intervention measures for addressing the macroeconomic shocks facing the nations since the beginning of FY 2009/2010 yet.
Amidst such anomaly, although the government denies, the recent white paper was brought out as a supplementary budget, it is not believable that minimum legal procedure was complied when the provision of tax waving and cash subsidies was purveyed in the white paper, which otherwise would only be included in a full-fledged budget. The white paper was a sloppy, incomplete, improper and de-linked political paper without any linkages with governments’ agreed policy documents and programs and policies of second Third-Year Interim Plan.
Regular expenditure had increased by 36.4 percent during the first seven months of the Fiscal Year 2009/10 but it has now declined by 4.7 percent. The lame excuse of releasing the white paper for making adjustments in salary, retirement benefit, dearness allowances, etc has, therefore, no meaning at all. The total expenses including Rs 4 billion for strengthening Nepal Police, Armed Police and National Security Intelligence Agency remained at just Rs 14 billion against the total allocation of Rs 160 billion. This shows the interest to announce supplementary budget was mollified. The annual budget, last year, was delayed by almost four months and hardly three months are left for the completion of current budget, which makes it difficult to believe that the Ministry of Finance will be able to utilize new funds before the approval of supplementary budget. The white paper has greater chance to remain as obsolete and expired ‘bakas patra’ (ones’ will) to poor citizens.
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 and growth and political stability. Studies had been conducted to investigate the relationship between political instability and per capita GDP growth in a sample of 113 countries between 1950 through 1982. The findings in such studies have shown that political instability tends to cause governments to collapse. It then estimates a model in which measures of political instability and economic growth are jointly determined. The message from the study is – ‘in countries and time periods with a high propensity of government collapse, growth is significantly lower than otherwise’.
Several researches have empirically exhibited a strong link between the negative effects of political instability on economic growth. In addition, political instability adversely affects growth by lowering the rates of productivity growth and, to a smaller degree, physical and human capital accumulation. Such empirical findings do have their own importance in carrying out policy discourse in Nepal to find out if economic freedom and ethnic homogeneity are beneficial to growth, while democracy may have a small negative effect, as in the case of sample countries in the study.
Ari Aisen and Francisco Veiga have used a dataset covering up to 169 countries between the period 1960 and 2004 and showed through regressions that political instability is particularly harmful because of its adverse effects on total factor productivity growth and, in a lesser scale, by discouraging physical and human capital accumulation. This study contributes to the existing literature on how politics affects economic performances.
Exercise to replace existing economic model without sufficiently investigating the prime cause for political instability and economic mismanagement would mean a sheer wastage of time to finalize the new constitution. Therefore, the task is to empirically determine the effects of political instability on economic growth.
There is general agreement that under the good growth hypothesis, people support governments’ policy design since economic growth generates higher income, which in turn, brings higher incomes to the people. This means growth has higher chances for maintaining stability. However, under the destabilizing growth hypothesis, growth generates complex changes in society, and therefore instability, which is largely political and ultimately the contributor of political instability. Making our mission rather clear, the choice is ours – the good growth or destabilizing growth?
Available economic literature on growth undermines the microeconomic instability associated with frequent changes of government policies. Almost all of the policy uncertainty variables are significantly and negatively correlated with economic growth. In general, work on stability versus growth connects economic growth to political stability, a situation where political stability means stability of economic policies on economic growth. The economists such as Abdiweli M. Ali emphasize the stability of economic policies.
Studies on the political economy of growth are based on contradictory results. Democracy is alleged both to promote and to inhibit economic development. To some, democracy and growth are unrelated. Political instability is sometimes identified as a cause of poor economic growth, and sometimes as a consequence of it. Most of the reviews allows for the possibility that democracy, political stability and economic growth are all reciprocally related.
During King Mahendra’s regime, the system that assessed the impact of delayed and regulated policy reform on peoples’ livelihood did not exist. Pro-monarchists would interpret even a minor reshuffle in the council of ministers as a sign of King’s response to make peoples’ life more comfortable with right people in the governance. However, advancement in infrastructure and communication system, for example, has created a system of global village, where America’s independent monetary and fiscal policy necessitates China to revisit its trade and investment policy and China’s undervalued exchange rate bothers United States because they think it has deteriorated USA’s BOP situation.
To conclude, Maoists conflict, prolonged and unresolved peace process, irregular political changes, and uncertainty into the market-place have reversed economic growth. The investors complain they have been paying higher entry or exit costs when they invest. This is the reason why prospective investors are compelled to decrease their investment to minimize these costs. The lesson is to develop intervention measures when weaker, and so-called ‘consensus-based’ reform is hastily experimented at a time when political instability adversely affects the growth prospects.
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