Why nations fail: Lessons for Nepal

Published On: December 4, 2020 07:00 AM NPT By: Anand Jha

Anand Jha

Anand Jha

Anand Jha is Associate Professor of Finance at Wayne State University, Detroit, USA.

The lesson for Nepal is to continue making political and economic institutions inclusive.  And also to develop a strong central government that can maintain law and order.

Just a few centuries ago, there was a little difference in the wealth of people worldwide. The British and French were not much more prosperous than the Indians, Chinese, or Mexicans. But the disparity in wealth has widened dramatically. In 1750, Asia, Africa, and Latin America, home to what we consider developing countries, had an average GNP per capita of $830. The developed countries, North America, Japan, Singapore, and South Korea, had a GNP per capita of $804. By 1990, the developed countries had twelve times higher GNP per capita. 

What created such a significant income disparity? Daren Acemoglu and James Robinson focus on this question in their seminal book Why Nations Fail. They argue that countries that developed a strong political center with inclusive political and economic institutions are rich today. A strong political center means a central government that can maintain law and order. An inclusive political system means a political system that empowers ordinary citizens. An inclusive economic institution means a business environment where ordinary people can quickly start a business, innovate, raise money, trade with others, and have no fear that their wealth will be taken away by the powerful. 

During 1700, the dominant political system was oligarchy worldwide. A handful of people controlled the political and economic institutions. Hence, all these countries had a similar level of wealth.

There were, however, some small differences. In countries like the UK and France, the power difference between the elite and the commoners was not as stark as in India, China, or Mexico. By 1700, the UK had a parliament, and France had councils. 

This small difference worked to their advantage. It made commoners more powerful as time went by, which chartered a path for a more inclusive political and economic system. 

Since the 1750s, there have been critical junctures such as the French Revolution and world wars. These critical junctures gave more power to the ordinary people. The elites did not fight back as hard because it was costlier to crush a rebellion, and benefits were not as high. In countries like Nepal, where the elites were too powerful and benefited immensely from the status quo, they had a strong interest and ability in crushing any rebellion.

Ordinary people kept getting stronger in the UK and France, and the elite’s power decreased. It became more challenging for the elites to take back economic and political power. Therefore, as time went by, their institutions became more inclusive. 

In contrast, India had inclusive politics only after its independence in 1947. It started having an inclusive economic institution only after 1991. Before that, India had what was often called the license Raj. The government gave licenses to only their friends and family, just like the royals of the UK did in the 1600s. This lack of inclusion in business activity hurt economic growth. By 1990 the economy was so bad that the Indian government needed money from the IMF and the World Bank to pay their employees. Forty-seven tons of gold was airlifted from India to the Bank of England as collateral. The lenders forced India to make its economic institutions inclusive. This event was India’s critical juncture.

India has prospered since then. If India can maintain inclusive political and economic institutions and continue to improve law and order, it will be a great country.

According to Acemoglu and Robinson, China has inclusive economic institutions but not political institutions. According to them, inclusive economic institutions without inclusive political institutions are not sustainable in the long term. Unless China reforms its politics, it will run out of steam at some point and is bound to fail. Acemoglu and Robinson cite the example of the Soviet Union. In the 1960s, USSR had spectacular economic growth. The world viewed them the same way they view China today. But USSR started stagnating in the 1980s, and by the start of 1990, it was struggling to pay its employees. 

From the perspective of developing a foundation for prosperity, Nepal is where the French and British were in the 1750s. Reaching this point has been a long and arduous path. Nepal had a strong center during the Rana period (1846-1951). But institutions were extractive, and not inclusive: ordinary people had no power and could not participate in either politics or the economy. There were no elections for politicians. Neither was there an organized mechanism for ordinary people to make the politics and economy inclusive. A brief introduction to inclusive politics between 1959 to 1960 did not pan out. King Mahendra and the army staged a coup d‘état, and it was back to oligarchy again. The center was still strong, but it continued to lack inclusion. After the 1990s, there was some degree of inclusion, but not enough. By 1996 a civil war had started. By the time the civil war was over and we had a constitution made by the people, it was 2015. Still, Madhesis representing more than thirty percent of the population, did not consider this constitution their own.

The political and economic institutions have become more inclusive, but we are not there yet. For example, even though there is a significant demand for medical colleges, it is still difficult to open one. This line of business is so profitable that politicians want to control it. The cartel still runs the transportation business.  

The lesson for Nepal is to continue making political and economic institutions inclusive.  And also to develop a strong central government that can maintain law and order. At the moment, the lack of a strong center is most striking. And without it, the future is bleak.

The central government should take on fewer responsibilities, but do its job effectively. Their primary job should be to maintain law and order, provide justice, and maintain stable foreign relationships. At present, we have a weak center, that is borderline anarchy. One of the most visible signs of this problem is that we see party cadres of the political parties, including the ruling party, intimidating travelers to pay them.

To ensure that we do not revert to extractive political and economic institutions, we need to empower the provincial government. This government should take on many of the nitty-gritty of governance. Let people organize and be able to ask for their rights. That will make it challenging to reverse inclusive institutions.

Except for a weak center, in many ways, we are heading in the right direction. We need to be vigilant so that it does not revert. 

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