Democracy & Development
A brief survey on what the cross-country emperical studies report on this issue
By Saday Hamal
There is always a never-ending debate on the forms of governance and specific institutions and/or policies that enhance economic performance and promote growth of a country. This debate usually evokes diverse views and comments from proponents of different schools of thoughts. Nepal has reached a phase where discussions as to what kind of governance and political set up should be adopted to promote and quicken economic growth is taking momentum. However, available international empirical evidences and researches have failed to point at a single correct solution.
Contemporary empirical researches have found that institutionalisation of regulation and trade are essential for sound economic performance. At the same time, the process and extent of institutionalisation is heavily influenced by the history and geography [See Hall, R. and C. Jones, 1990, “Why Do Some Countries Produce so much more Output per Worker than Others?”, Quarterly Journal of Economics 114, pp. 83-116; and Acemoglu, D., S. Johnson and J. Robinson, 2001, “The Colonial Origins of Comparative Development: An Empirical Investigation”, American Economic Review 91, pp. 1369-1401]. Though commonly held view that ‘good institutions are necessary for successful development’ is supported by most empirical researches. Yet, it is unclear which societal institution provides impetus to undertake growth-promoting policies. Institution is defined as broad regulatory and trade regime followed under a political arrangement; though ‘social infrastructure’, ‘economic institutions’, ‘structural policy’ or simply ‘institutions’ are also used to convey similar meaning and used interchangeably in different researches.
In Nepal’s case, trade regime was liberalised at a rapid pace though regulatory framework remained weak. The liberalisation had taken place especially after the political change of 90s. One of the compelling reasons for such change was the fact that the countries around the world were liberalising their economies during this period and Nepal adopted the ‘me-too’ approach. More significant rationale for liberalisation in Nepal was donor-driven since larger portion of the financial aid from these donors to Nepal had a condition that required liberalisation of Nepali economy. Because of this, policymaking became increasingly donor-driven and without the evaluation of the requirement of the domestic economy. Moreover, though the economy was liberalised at the policymaking level, implementation usually lacked direction. When the regulatory framework to support and enhance liberalisation remained weak, both in design and implementation, liberalisation itself became a ‘half-baked’ process lacking any direction. Perhaps the Nepali economy was not ready to absorb such rapid pace of liberalisation which means gradualism would have been better policy option (which is subject to further research). Thus, liberalisation neither could be institutionalised (good institutions needed for economic development could not be created) nor could it provide the originally envisaged benefit to the larger section of population. Haphazard implementation of liberalisation provided continuity to the existing urban-rural divide. Many analysts believe that the growing economic gap between urban and rural Nepal provided fuel to the fire of the Maoist uprising.
As far as the question of political system is concerned, the commonly held assumption is that ‘democracy promotes economic development’, suggesting that causality (direction) flows from democracy to economic development. The case that democracy promotes development rests on the central idea that the political institutions critical to economic development are more likely to exist and function effectively under democratic rule. Democratic institutions may strengthen the rule of law; but they also have the capacity to undermine it. This causality, from democracy to development, has been proved by some researchers [See Papaioannou, E., and G. Siourounis, 2004, “Democratization and Growth”, LBS, Mimeo; and Rodrik, D., and R. Wacziarg, 2005, “Do Democratic Transitions Produce Bad Economic Outcomes?” American Economic Review 95, pp. 50-56]. At the same time, however, ‘evidence that democratisations yield subsequent economic growth is quite weak and political regimes may still influence economic growth.’ [Persson, T., and G. Tabellini, Jan 2006, “Democracy and Development: The Devils in the Detail”, Working Paper 11993, NBER, Cambridge]. Persson and Tabellini investigated this relationship between democratisation and economic liberalisation in their research paper and they found that both democratisation and economic liberalisation quicken the pace of growth; yet, the sequence of reforms assumes more significance. To explain further, reforms have both significant and positive effect on growth, with economic reforms having the stronger effect. This research presents empirical evidence that the countries that liberalise their economy before extending political rights tend to achieve growth and development faster. Another study [Giavazzi, F., and G. Tabellini, 2005, “Economic and Political Liberalisations” Journal of Monetary Economics 52, pp. 1297- 1330] has also addressed this debate regarding ‘Liberalisation after Democracy’ or Democracy after Liberalisation’. The researchers have found that ‘Democracy after Liberalisation’ has stronger effect on growth. The credible reasons for this occurrence are: (1) young democracies in closed economic environments are more likely to fall into cycle of redistributive conflict and populist policies; and (2) young democracies in open economies are more likely to concentrate on gaining economic efficiency.
Given these theoretical backgrounds, Nepal does not fall under any specific model. Reforms leading to liberalisation had already been initiated well before 1990, at least in the financial sector. Hence, we cannot classify Nepal as a country with closed economic environment in a strictest sense. However, policy decisions that took place during and after 90s strongly show redistributive and populist biases. For instance, the policy decision that reduced the land holding ceilings was based on a logic of political and social justice than economic one. The proponents of this policy decision see reduction in land ceiling and consequent redistribution of land as one of the ways to correct distortion in wealth distribution. The opponents dismiss that logic and say that the land redistribution unnecessarily fragments the land holding further and the small land holders are bound to remain at subsistence level because they cannot take advantage of the ‘economies of scale’. Instead, they advise the government to generate other employment opportunities, if it seriously intends to correct distortion in wealth distribution and bridge the gap between the rich and poor. Growing trend among the Nepalis to seek employment abroad, mostly in India, may point at the failure of these redistributive policies and inadequacy of mechanisms aimed at correcting wealth distribution distortion. More significant reason for this is the rapidly declining economic activity within the country as a result of the Maoist insurgency.
Another issue that should be given priority, but has fallen in populist bias, is rural focus. Earlier, during the Panchayat regime, ‘Back to the Village’ campaign was implemented which may have yielded some economic benefits though it is disputed by many analysts. It is also claimed that this campaign had strong political bias rather than any economic justification. In post democratic era, the CPN (UML), during its nine months rule, introduced Build Your Own Village programme . Theoretically, it had all the elements to alter the face of rural Nepal – enough budget, true concept of decentralisation, etc. However, the implementation process again lacked the vital direction and it achieved less than desired outcome. It provided a valuable lesson that only channeling resources without setting up a strong mechanism that ensures accountability in the spending, does not bring in desired results. The only consolation this program has provided is that rural focus has been imbibed prominently in successive plans and policies of the subsequent governments.
Democracy has many features, the major one being a popularly elected government. But there are different forms of such popularly elected government, with broad two types - parliamentary and presidential. Also the systems to elect the government are different - proportional and majoritarian. Persson [Persson, T., March 2005, “Forms of Democracy, Policy and Economic Development”, Working Paper 11171, NBER, Cambridge] emphasises that the specific political arrangement – the form of democracy, rather than democracy per se – may be one of the links between history, current policy and economic development. He also adds that if political arrangements influence fiscal policy and corruption, they are likely to be reflected in structural policies (such as regulation to protect property rights, non-protective trade mechanism etc.) that promote economic development; and if history and culture shape important societal institutions, they are likely to be reflected in the design of political institutions (such as the form of government, the electoral system etc). His research, based on the study of 140 countries during the period 1960 to 2000, concludes that parliamentary democracy, as it attains maturity, exerts strong positive impact on economic performance through structural policies. Also the question of permanent and temporary reforms is evaluated in his study which gives valid conclusion that permanent reforms, rather than temporary ones, have stronger effect on structural policies. He concludes that reforms initiated by the government in parliamentary setup positively influence the liberalisation of trade and the protection of property rights and that the Parliamentary democracy is able to alter structural policies and expand government spending significantly. This conclusion also validates the finding of another research [Persson, T., G. Roland and G. Tabellini, 2000, “Comparative Politics and Public Finance”, Journal of Political and Public Finance 108, pp. 1121-1161] that parliamentary system helps produce balanced spending programs (in development areas) that serve broad majority of populace than other forms of democratic setup since parliamentary system always has an inherent requirement of confidence measures.
Structural polices in Nepal as mentioned above, are donor driven rather than being guided by our own economic needs. As opposed to the findings of the researches, the parliamentary system in Nepal has not been able to influence liberalisation process significantly. It has failed to provide direction and initiate actions to alter structural policies. In fact, the Nepali policymakers have shown a strong tendency to devote time in partisan politics wherein crucial economic issues are continually neglected either because of lack of knowledge or inability to prioritise. For instance, electoral manifesto of every political party provides elusive indication, at the best, of what economic policies it will adopt and how it plans to usher in development. The party-leaders concerned either evade or provide superficial answers to such questions. It clearly shows that the state of the economy and what needs to be done turns out to be the least-prioritised area. They strongly exhibit ‘as-and-when-it-comes’ tendency. In such instance, it is predictable that the structural (economic) polices will be dominated by the donor agencies.
Moreover, our historical and cultural background may have influenced our upbringing to such an extent that we are not able to overcome their influence. In the modern history of Nepal, the politics has always been individual and/or community-based where a particular individual or community would not allow other individuals and/or communities participate in decision-making process. To maintain and continue such domination, the decision-making apparatus and process were kept opaque. And with opaque process in place, there was no need to build a culture of responsibility and accountability. Sadly, the same trend is evident even after democracy within the political parties and the government bureaucracy alike. That is the most apparent reason why our electoral practice is one of the least reformed area where the political parties, for instance, do not have to maintain any books of accounts or audit those accounts or disclose the amount of donations collected. Such an arrangement induces corruption for collecting party funds. In addition, they have shown no inclination to introduce laws that enforce strict disclosure norms. The same is illustrated by the last year’s parliamentary declaration of reservation for women. This has provided for reservation in the government jobs only ignoring the need for similar reservation in the political parties. When the policymakers of the political parties, themselves engage in dubious practices and promote double standards, it is not wise to expect them to devise transparent and workable mechanism in the way of the governance.
Finally, regarding this issue of link between democracy and economic growth, Gilles [Gilles, D., 2005, “Democracy and Economic Development”, Policy Matters Studies, International Development Series, IRPP, Montreal] rightly concludes that ‘there is no ironclad law defining the relationship between democracy and economic growth and the effects, where they appear, are more subtle and indirect.’ He rightly suggests that the quality of governance is an important influence on economic growth. Unfortunately, the quality of governance is an unknown phrase to our policymakers since ‘politics of manipulation is the only mantra they like to recite.
(Hamal is Lecturer, Management Campus, Purbanchal University, Biratnagar)
