The erosion of political capital created after the promulgation of new constitution is leading to a rising level of public frustration which might trigger mass demonstration and disorder

The present economic model of Nepal has a number of interesting structural characteristics. First, it focuses on imports. The government gets most of its revenue from import which is the basis for financing public expenditure, mostly regular expenditure necessary for the functioning of the state. In an import-based revenue structure, there is an embedded incentive to maintain luxury imports.  Second, Nepal is gradually deindustrializing. The contribution of manufacturing was slightly over10 percent only a decade ago. Now it has dropped to less than six percent.   Many industries linked with agriculture have closed because they find it difficult to compete with imports. Third, Nepal’s agricultural sector has failed to take off. There was a time when food grain—mainly rice—was one of the major export items of the country. Now rice is one of Nepal’s major import items and it is increasing every year. 

In budget speeches agriculture is described as a priority sector. In practice it is lagging and lethargic. The link between state agencies and the farmer is weak. Subsidies and various programs designed to help the farmers are misused or swindled by intermediaries and the concerned authorities have not made any serious efforts to control this. Even the finance minister in a moment of rare frankness admits that governmental financial incentives do not reach those who need it the most. Annual targets in irrigation are always optimistic but rarely supported by actual performance.  Agricultural bureaucracy is focused more on process than results because under-performance is rarely questioned and is generally not an important criterion in career growth. This reduces the productivity of investments and reinforces a sense of cynicism.

Fourth, budget allocation for infrastructure is rightly seen as a key to economic growth.  But public sector ‎ capital budgeting and overall public expenditure management is becoming increasingly ad hoc and aligned with the whims and fancy of the political class. The achievements of the so-called “national pride projects” are mostly sub-par and the same reasons for under-performance are repeated every year.  There seems to be no political will and determination to correct past mistakes and institute reforms to improve in the future. However,   the Prime Minister openly accuses builders and contractors of being the main culprits for failures in completing infrastructure projects conveniently forgetting that many of them are leading members of crony capitalism being protected by his government.  

Fifth, the yawning deficit in the balance of trade and ultimately the balance of payment has been managed so far with income from remittances from Nepalis working in the Middle East, Europe and North America. Lack of manufacturing and remunerative agriculture has literally forced most of the new entrants in the labor force to look for employment in other countries.  The flow of remittances has helped to maintain the peg with India which is under pressure since inflation rate in Nepal is generally higher than in India while the overall productivity is lower. 

Living on remittance 
Nepal is increasingly a remittance-based economy with most of the income spent on consumption. On the positive side, it has prompted the growth of the service sector and also helped in reducing absolute poverty.  However, remittance fuelled revenue growth is being increasingly frittered away by the ruling class in serving its political interests at the cost of the downtrodden and the poor. Investment by the state in public goods that includes, among others, efforts to promote good governance while trying to support an investment atmosphere that is conducive to private investments remains an elusive dream. The hope that a stable government that has a mandate to rule for five years will change this scenario is fading fast. Since a  large number of young people are going abroad there is less  pressure on the government to change its traditional working style so that it becomes less corrupt and more in tune with the need for excellence, efficiency and meritocracy. Politics has become business and public service is turning into self service—an easy way to become rich in a fashionable and glamorous manner.

Domar model
The binding constraint is corruption that thrives in tacit support and blessing of the ruling class.  But government authorities are not willing to admit this reality. Government planners are still hooked on Professor Evsey David Domar’s model of economic growth developed in the mid 20th century. The model assumes an almost proportionate relationship between investment and output and is based on the implied assumption that there is a set of fairly well established institutions in line with the functioning of a capitalist system so that the country is out of recession in the short run through an increase in investments. 

The Domar model of growth was conceptualized as a short run solution for a developed capitalist economy suffering from recession. In Nepal the objective reality is different. The institutional structure is growth focused only in form, not in content. Since politics is becoming another thrilling way to make money where the common people are forced to struggle for broken crumbs, under the table investment by the state becomes an opportunity for different power centers to enrich themselves. The whole idea of a fixed proportionality between investments and output is simply not a dependable proposition.  Thus cost and time overruns become normal since they provide an easy way to cheat and steal public money while screaming about socialist development in every nook and corner of the country. 

It is frequently reported in the press that “lucrative” government positions are for sale for the highest bidder. To counter this tendency we do have a constitutional body called Commission for Investigating the Abuse of Authority (CIAA). However, it has yet to establish itself as an effective institution in controlling corruption. For many years the government showed no interest in appointing its chief. Even when appointments were made its functioning has remained murky and dull. The question being raised now is: Who is there to guard the guards when the commissioners who were supposed to help maintain integrity in public life are themselves being charged of bribery and misuse of public property for money?

Costly mistake  
Stealing of public money including misuse of public property  (remember the willingness of the high and mighty to turn the other way even when Tundikhel—the largest open public space in the valley—was being used for private gain)is the new norm in democratic Nepal that is committed through the constitution to follow a socialist order.  It is sad to see the political capital that was created after the general election over a year ago being used to make a few rich at the cost of the many. However, the government seems to think that anyone who does not see the glow of hope and prosperity is a misfit, who needs to be silenced, if necessary both by threat and legislation. 

After the promulgation of the new constitution and the general election, Nepal created a new structure of political capital for rapid sustainable economic growth. However, in the last one year the leadership has done all it can to prove that it does not intend to govern with integrity and fairness. The erosion of political capital created after the promulgation of new constitution is remarkable. It is leading to a rising level of public frustration, so far below the boiling point, necessary for mass demonstration and disorder. Taking people for granted on the ground that the government holds a two-thirds majority can become a costly mistake in the future. 

The author is the chairman of RPP (United)

 
• Nepal
 
• economic_model
 
• imports
 
• expenditure
 
• revenue