Emergence of a capable state

  • It would be best for the Nepali state to take on less and focus on doing a limited number of things better
Emergence of a capable state

Sep 2, 2014-

Debates on the future direction of Nepal’s economy seem to centre on questions of the role of the state versus the market. Arguments focus on the fundamental failings (or not) of the market, and the consequent need for the state to intervene (or not). As an intellectual activity and source of heated exchanges, this is attractive but as a discourse that helps to clarify Nepal’s near future, it is less than helpful. It lacks any realism on the current weakness of the state and therefore, does not offer policymakers helpful advice on what the future direction of the role of the state may be.

My question for Nepal is to ask, in what way can the Nepali state be most conducive for long-term growth and poverty reduction? To answer this question, I will first look at global experience, not least from Asia, and then place it in the context of present-day Nepal.

Global evidence

There are plenty of examples of success in growth and poverty reduction in the world, definitely in most European countries and in North America but also increasingly in Asia. In all these countries, fast growth was obtained at some point, delivered and sustained by private sector firms, creating jobs and raising living standards. What is more difficult to analyse is the role the state played in each of these countries.

Indeed, the state played a rather different role in Sweden compared to the United Kingdom or the Unites States; it was also rather different from the role the state played in other success stories, such as Taiwan, South Korea or Japan. The role of the state in other nearby countries, such as India, Bangladesh or China, was also surely quite different—but now all three are growing at rather fast rates.

Nevertheless, all these success stories have something in common, and that is politics. What appears to be most relevant for success is a clear shared understanding in the politics of these countries that growth is important for the future of the country: in all these countries, the legitimacy of the core political class is based on success in growth and poverty reduction. The politics of all these countries essentially reached an implicit settlement that limits the possibility that growth will be fundamentally harmed by the actions of politicians. From this politics, a state emerged, embedded with these norms and a set of rules of the game which protect these prospects. In a more positive sense, the state was entrusted to promote growth and poverty reduction but with clear limits that reflected the local scope and limitations of the state.

In communist and autocratic China, growth-led poverty reduction became a clear source of legitimacy since the late 1970s. With a centuries-long history of a strong centralised state and bureaucracy, it could succeed in using state-controlled processes to achieve some of its objectives, even though it had to change course once it understood the limits of the state. This led to the liberalising reforms by Deng Xiaoping from 1979. In India, there has been an initially slow but then convincing consensus on the need for growth and liberalisation since the 1990s, and the limits of the state as envisioned by Nehru decades earlier to deliver growth. Even Bangladesh, which performs poorly in all kinds of governance and corruption indicators, mostly worse than Nepal, has seen the emergence since the 1980s of an apparent political consensus that growth based on highly labour-intensive production of textiles and garments was desirable. The consensus was not built around huge government intervention, rather a more laissez-faire approach in many respects. The same state responded to another political consensus that good service delivery was important by effectively allowing indigenous but huge non-state actors to play a central role in local services. The result is that growth has been steady at 7 percent for almost two decades, and poverty is coming down fast, despite the rather dismal governance of the state.

In short, when progress started being made in these countries, the state played a role, but that role was mainly driven by a pragmatic recognition of what the state can achieve rather than just ideology or wishful thinking. In China, a strong pre-existing state was influential; in Bangladesh, a poorly governed state with limited capability in practice offered more laissez-faire and allowed other players to take a larger stake.

Strengths of the Nepali state

Here lie important lessons for Nepal. Pre-1990, the state was effectively a system of delivery to the benefit of oligarchic politics, serving a small governing elite, that could use the system to its advantage and foster personal patronage networks. Emerging from decades of political troubles, the current state is still in transition. At the moment, implementation capacity is very weak. Despite lots of well-intentioned bureaucrats, the system appears to struggle tremendously to deliver on time and effectively. Budgets struggle to be spent, or at least, are spent many months late. Capital budgets are underutilised; maintenance budgets not well matched. Many policy promises are made but implementation is poor.

So rather than debating the role of the state versus the market on an ideological level, Nepal could learn to better appreciate the strength of the state it has at the moment. Growth and poverty reduction can emerge as priorities from different systems but these goals can only be achieved by a system that properly recognises the scope and limitations of the state as it exists.

My own understanding is that for Nepal, encouraging the state to take on less but to focus on doing a relatively limited number of things better would be best for the country. This state still needs to build up credibility with the business community as well as with its citizens, by showing that it can deliver. It needs to better signal that it is trying to lay the foundations for growth and for better public service delivery to all. It should stake its credibility on achieving a small number of things.

What state actions will contribute to this credibility? First, it can help to ensure a Power Trade Agreement/Power Development Agreement deal on time, and then work unwaveringly to deliver hydropower. It can start spending the government budget on time and find a way to simplify budgetary processes across government. It can work harder to show to the public that it does not act in its own interest or in the interest of the few but rather, that it is there to serve the people. Finally, to achieve all of this, politics must be more realistic about what the state can take on.

Dercon is Chief Economist of the UK’s Department for International Development and Professor of Development Economics at the University of Oxford

Published: 03-09-2014 09:09

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