Sunday, July 10, 2011

Political instability and economic growth in Nepal

Here is Prem Khanal’s take on the relationship between political instability and economic growth. Here is what I argued about frequent political change (democracy and autocracy only-- not political instability) and growth.

Political instability saps economic growth


Nepal´s economic growth rate slid to 3.5 percent this year, the lowest in the last three years, raising a pertinent question: Is this poor performance linked to our political instability?

Analyses of Nepal´s growth data for the last 20 years and the political situation clearly indicate that the economy and politics are intricately linked and economic growth and political stability have a strong positive correlation. 

The major political changes and election of majority governments are always followed by robust economic growth. Likewise, political instability and hung parliaments often lead to weak performance by the economy.

Nepal attained high economic growth of 7.9 percent in fiscal year 1993/94, following the election of a majority government under the leadership of the Nepali Congress in the first general election held after Jananadolan-I. During the subsequent three and half years under NC rule, the economy grew by 5.3 percent on average.

However, the mid-term election held in November 1994 produced a hung parliament and the CPN-UML took leadership of a minority government. Nepal´s first communist government, which was headed by Manmohan Adhikari, lasted only nine months. The country then saw four more governments in as many years, led in turn by Sher Bahadur Deuba, Lokendra Bahadur Chand, Surya Bahadur Thapa and the late Girija Prasad Koirala.

During these years of political instability the economy teetered. The average growth rate in those five years was hardly 4 percent and in fiscal year 1997/98 it dipped to 3.3 percent.

The general election held in May 1999 once again produced a majority government led by the Nepali Congress and the economic growth rate bounced back to 6.1 percent in 1999/2000 and remained relatively high at 5.4 percent the following year.

By the end of the 1990s the Maoist insurgency has begun to peak and economic growth again started to falter. The year 2001/02 saw the highest single-year insurgency toll of over 5,000 and not surprisingly the economic growth rate sank to 0.16 percent and the economy was in the doldrums in successive years.

The growth rates remained pessimistic, averaging slightly over 3 percent, even during the king´s 15-month direct rule.

The success of Janaandolan-II that humbled the king´s rule and ended the insurgency provided an immediate boost to the economy. It grew by over 5.8 percent in 2007/08.

As the Janandolan euphoria gradually receded and political uncertainty crept back, the economy started to falter again. In the last three years economic growth rate has slid steadily, culminating in this year´s 3.5 percent.

Nice article. It would be even more revealing if we look at growth rate, political instability, and investment rate/capital formation. The reason is that the fruits of some investment projects is seen after some years of inception or completion. The effects are not immediately visible. For instance, during FY 2059/60 budget, the then finance minister Dr. Ram Sharan Mahat pumped in large amount of money into infrastructure projects. I think its positive impact helped sustain growth (though low) rate during the insurgency period. Without the investment it would not have been possible to sustain even that low growth rate during the insurgency period. Al least, local economies remained buoyant during insurgency as well. A lagged effect (few years) of capital expenditure/formation might reveal a truer relationship.