Inside of a Twin Otter airplane. Nepal, 1974. Photo: Rich Pfau / Nepal Peace Corp Photo History Project
Inside of a Twin Otter airplane. Nepal, 1974. Photo: Rich Pfau / Nepal Peace Corp Photo History Project

Development sermons

Do political cabals and business cartels explain the woes of Nepali economy?
Consider a stagnant economy ruled by an ethnic elite, in whose protection a number of business houses make the rules for the market. The political elite gains electoral consent through regular polls but dithers on its promises of growth and prosperity. However, they are faced with the challenge of governing the country on a low tax base. A large section of the population is too poor to pay substantial tax, while big businesses find ways to evade paying their share and siphon the money to overseas tax-havens, often with the aim of returning it to their own coffers as 'foreign investment'. So how does such a government manage the necessary expenditures?
Over the past half century or so, foreign aid has been touted as one solution. In the decades following the end of the Second World War, the race for geopolitical influence prompted the feuding Cold War blocs to provide countries of the Third World with resources to fund their modernisation endeavour. There is no clear evidence of the success of such efforts, but foreign-aid funds continue to be an important part of the global south's relationship with the global north. Nepal's Panchayat form of government, established by King Mahendra by ousting Nepal's first democratically elected government, benefited from the Cold War politics when the United States, the Soviet Union, China and India were all keen to fund projects either of the autocrat's choice or what the development experts of these donor countries presumed was necessary. When the Nepali state under the Panchayat rule started going bankrupt in the 1980s – due to a vicious circle of rising government expenditures, inflation, and import-fuelled current-account deficit – the World Bank, who had by then been a major player in the country's development schemes, and the International Monetary Fund (IMF), came to the rescue.

No cogent assessment of Nepal's post-reform economic trajectory has come out yet.

Unlike in earlier years, however, when their funds were largely linked to projects that were part of the periodic national economic plans, new disbursements were to be tied to a different set of conditions – one aimed at promoting markets and private capital, and popularly known as structural adjustments or market liberalisation. Additionally, these reforms were to reprioritise government budgets from different forms of subsidies and several under-performing public enterprises to service delivery in primary education, healthcare and infrastructure investment. Given its diminished credibility, the Panchayat regime could not survive despite the injection of these funds. But that did not mean the structural reforms were to go away. Subsequent governments have either unwittingly acquiesced or have been vocal champions of these reforms.
No cogent assessment of Nepal's post-reform economic trajectory has come out yet. The proponents of market liberalisation point to visible signs of material improvements over the past 30 years, despite a decade-long conflict, as evidence of its success. But even they agree that the reforms have not achieved what was intended. However, the reason for the failure, they argue, doesn't lie in the reforms themselves, but their execution. Critics of this view have instead argued that the reforms that followed the Washington Consensus blueprint increased social tensions and inequality, weakening democratic governance.
'Cabals and Cartels: An Up Close Look at Nepal's Turbulent Transition and Disrupted Development' by Rajib Upadhya. FinePrint 2020
'Cabals and Cartels: An Up Close Look at Nepal's Turbulent Transition and Disrupted Development' by Rajib Upadhya. FinePrint 2020
In Cabal and Cartels, which aims to give an "up close look at Nepal's turbulent transition and disrupted development", Rajib Upadhya, a former employee of the World Bank, makes an earnest argument for the pro-reform position. As the book's title suggests, his thesis is that Nepal is ruled by cabals, an unspecified assemblage of political groups vying for power and profit, and cartels, groups of big businesses that dictate and distort the directions of the market. These, he argues, are impediments to growth and development in Nepal.
Upadhya's response to this predicament mirrors what is by now an oft-repeated assessment of developing countries: that they will need a "redoubling of economic and institutional reforms". His diagnosis of Nepal's development woes appears to be a restatement of familiar challenges: the corrupt politicians and the predatory businesses. In rehearsing the standard arguments for reforms found in much of development literature, however, Upadhya forgets to raise some important questions of policy and politics, including the fact that the cabals and cartels might in fact be symptoms rather than the causes of Nepal's economic ill-health. This makes the book an inconsistent but interesting snapshot of some key events and personalities in Nepali politics and bureaucracy over the past two decades, rather than a volume that clarifies Nepal's political economy.
Recasting reforms
Much of Cabal and Cartels is written around recollections of events that Upadhya was privy to as a Kathmandu-based employee of the World Bank. Consequently, the book recalls his attempts to lobby institutions and individuals – from Nepal's political parties to the Crown Prince Dipendra to the Maoists – to support projects which were part of World Bank's activities in the country. Upadhya provides colourful accounts of wide-ranging policies and practices, quite often those pursued with the involvement of international financial institutions like the Bank, presenting them as earnest attempts to reform the country's cabals and cartels. Yet the paradoxes of such plans are amply clear. As one such account shows, efforts to institute changes like banking reforms by indulging ruling parties and state authorities at times results in incentivising them to continue their excesses, while at the same time requiring them to correct their malpractices.

It is more likely that "income per capita and democracy are correlated because the same features of a society simultaneously determine how prosperous and how democratic it is."

What becomes clear from the book is that organisations with a large global footprint often engage with all relevant political elites – regardless of their politics or ideology – in the hopes that prior programmes and reforms are continued regime after regime. This is what prompts the writer and the World Bank chiefs, for example, to visit senior Maoist leaders soon after they become public following the end of King Gyanendra's direct rule. More interesting, however, is the fact that Nepal's political elites rarely appear to refuse the Bank's overtures. From the monarch who had just ousted the elected prime minister, to the same ousted prime minister, to the Maoist government, all appear willing to toe the line advocated by the Bank, as long as the treasury is assured a handsome cash inflow. As Upadhya writes, "The show must go on because the targets set at both ends of the aid equation are so sacrosanct and the clerical motivations of the individuals associated with those decisions are so irrefutable." In the process, the author gives a glimpse of how global institutions like the World Bank interact with political and technocratic elites of the global south.
Like many opining on the 'failures' of Nepal's development, Upadhya agrees that much of the problem lies is the 'excessive politicisation' of the state and society. Most observers of Nepal will recognise that the country's political parties have often put their factional interests ahead of the public good, by protecting particular business syndicates, from the for-profit medical education to the construction sector. Yet it is difficult to argue that patronage to monopolies is a new feature of post-democratic Nepal. It is worth noting that the author traces the rise of the extractive political class, the so-called cabals, to the mid-1990s, ignoring the persistence of patronage structures over time that transcend party politics. In such a context, charges of "over-politicisation" or the lack of "neutral voices" – in the words of one-time World Bank official (and current Afghan president) Ashraf Ghani – seem superficial. Such analyses will also lead one to misread recent political movements that have demanded more representative executive and legislative bodies, and which sought to challenge the political monopoly of a few communities in Nepal. 
Disproportional doubts
Unsurprisingly, we therefore find the writer being critical of the introduction of proportional representation (PR) in the Parliament, which, according to him, only amplifies the problem of extractive cabal politics. The party-based PR system elects 40 percent of the MPs in the lower house, a provision ostensibly in place to ensure the representation of women and marginalised ethnicities in the legislature. The writer accurately points out that the basic purpose of this scheme has been widely abused by political parties, who have doled out seats to individuals (private interests) who have made financial contributions to them. This sometimes means that the PR seats are awarded to proprietors of large business houses. This broad condemnation of a system of elections, however, ignores that the ascendance of monied interest is not a feature unique to the PR, and is as serious a problem in democracies without PR, including the United States and India. In the absence of any figures or comparative analysis, Upadhya's criticism of the PR system as the source of new cronyism seems like a restatement of the problem, rather than a useful diagnosis. Meanwhile, he also fails to consider any political economic transformation the sudden infusion of women and ethnic minorities in governing institutions might be having in the country. In fact, this contradicts his own purported support for an "inclusive localism", proposed by the economist and former chief economic adviser to the government of India, Raghuram Rajan, to check the excesses of the market and the state. Why Rajan's "inclusive localism" should succeed while the existing form of inclusion in Nepal should be deemed a recipe for failure is not clear.
Interestingly, the book itself presents evidence that militates against this dim attitude towards inclusion of minorities and a naive belief in the meritocratic powers of liberal capitalism. One among them is the study conducted by the British aid agency DFID in 2017, which found that 27 business houses in Nepal "corner 14 key sectors of the economy covering all aspects of daily life and consumer demand." Of these, the Marwari community dominates close to 48 percent of the sector, followed by the Newari community which controls 26 percent, while the rest is held by hill ethnic groups, chiefly Brahmin and Chettris.

The author traces the rise of the extractive political class, the so-called cabals, to the mid-1990s, ignoring the persistence of patronage structures over time that transcend party politics.

This remarkable piece of evidence not only supports the rather uncontroversial thesis of the book – that the political economy of Nepal is controlled by a few – but also hints at the possible social roots of that problem. Upadhya also notes how a World Bank study titled 'Unequal Citizens' – "a multi-year, multi-donor, multi-stakeholder and multi-million-dollar piece of research into gender and social inequalities across Nepali society" – completely missed out on the Madhesi perspective right on the eve of the Madhesi movement of 2007. Upadhya adds that a "quick addendum was subsequently slapped on to an early second edition."
One might assume that such blind spots would have been seriously reexamined by analysts at the World Bank. But their scepticism of the politics of inclusion seem more deep seated. As the 2019 South Asian Economic Focus report titled 'Making Decentralization Work' makes clear, the "historical identity [of provinces] is important, but it should not prevent empowerment of both the local and central level." One could ask, if the World Bank were really keen on political stability for the purposes of growth, should it really be pressing for more empowerment of an unrepresentative centre, and undermine the potentially explosive issue of identity? The same logic prevails in Upadhya's argument when he writes that the 2015 Constitution should have prioritised 'economic reform' over politics, when in fact it did just that. Most scholars of federalism agree that Nepal's constitutional structure empowers the local governments and the federal centre at the expense of the provinces, favouring economistic rationales over any concern for 'historical identity'.
The growth paradox
The despondent attitude the writer takes of the new system is ultimately not based on hard facts but on a faith that economic growth naturally brings democracy, and that the new Constitution has taken the wrong path by ignoring this connection. The right way, he writes, is one where, "the economy will stabilize democracy and not the other way around." This, he adds, "will require an overhaul in our mindsets, a redoubling of economic and institutional reforms and a quadrupling of political will across all layers of government if things are to get done."
Upadhya's hypothesis mirrors works by economists like Adam Prezworski who have found a strong relationship between average incomes and the survival of democracy. Several other works in development economics, while pointing out this correlation, have noted that there is "no evidence that economic development has a causal effect on democracy." Instead, as economist James Robinson argues, it is more likely that "income per capita and democracy are correlated because the same features of a society simultaneously determine how prosperous and how democratic it is."
In his analysis of post-structural-adjustment political economy, economist Biplab Dasgupta notes how the proponents of 'reform' usually prioritise 'political stability' over other political goals in developing countries. This, paradoxically, requires them to appeal to those who monopolise politics and the market, with the hope that powers of persuasion of organisations like the World Bank will somehow work. Dasgupta finds this framework internally inconsistent, ahistorical, and "oriented towards justifying market-centered policies under authoritarian regimes" – or as we see in Nepal's case, under the political cabals. Upadhya suggests that he has indeed seen the limits of such an approach, and yet he recommends continuing the same strategy, implicitly assuming the need for well-intentioned ministers or chief secretaries or central bankers for making institutional reforms, instead of political movements that could challenge the power of cartels and unaccountable cabals through a more representative body politic.

Upadhya's criticism of the PR system as the source of new cronyism seems like a restatement of the problem, rather than a useful diagnosis.

For what it is worth, the author is at times critical of the donors' activities in the country, and is in fact at his sharpest when he does so. However, even his most substantial criticism of them is that they fail to live up to their own high standards. After explaining the pitfalls of "fungible", untied foreign aid – its abuse by political elites to fund their own patronage, for example – Upadhya argues for strict constraints on how aid and the finances it frees up are to be spent. One solution would be what in development jargon is called a Medium-Term Expenditure Framework (MTEF): a system "that clearly and credibly linked the government expenditures with its development priorities". In Nepal, meanwhile, the MTEF system was so grossly manipulated by the government that it was eventually abandoned. Yet, Upadhya writes, "some of the donors still prefer to pretend otherwise", who recognise the problem but continue to "reinforce a toxic sense of entitlement among the recipients." However, besides oiling the relationship between the donors and the governments, what benefits such fiscal constraints exactly bring to the public – a continuing subject of global debate – is not spelled out. Instead, the writer laments that the "old-school problem-solvers" and "contrarian trouble-shooters" of the development business are no longer around, replaced by the "development dilettante who sermons after the fact."
It is worth noting that the writer's critique of donor agency is largely based on economist William Easterly's ideas, whose arguments, Upadhya writes, "shaped my own views on how wrong foreign aid can go in the wrong hand." Easterly's scepticism of donors comes from his advocacy of free-market capitalism for development, what progressive economists have described as a "defense of some version of neoliberalism in the interest of the global poor". This perhaps explains the author's emphasis on parsimony in government spending, even though he at times contradicts this with a critique of the free market's ability to enhance social mobility, adding that "there is very little evidence to suggest that free market policies adopted after 1990 contributed to the rise of anything close to a strong middleclass." Nevertheless, this nod to the increasingly strong global scepticism of the equalising powers of market capitalism doesn't go beyond isolated observations.
Cabals and Cartels is a readable account of Nepal's development politicking. However, the writer's overreliance on the anecdotal rather than analytical undermines much of the book's project. As a particular telling example, for a book on contemporary politics and economy, some might be surprised by the final chapter, where the author traces what he calls his "colorful heritage". Outlining his family's ancestry in some detail, Upadhya goes on to admit his kinship with Nepal's several "illustrious" families and individuals, including a former prime minister. Perceptive readers might even start to wonder if these informal networks stretching generations, with their long-standing connections, wealth, power and reach, constitute cartels and cabals of their own kind. Inadvertently, the book's value might be more sociological than economic.
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Himal Southasian