INTERNATIONAL

Economic Development and Good Governance

T.V Ramaswamy

The competitive environment of the last decade of the last century has had a dramatic effect in reshaping companies and industry. Globalising markets, instantaneous communication, travel at the speed of sound, political realignments, changing demographics, technological innovations etc. are changing the competitive positioning of countries too.

Attitudes towards governments are changing. Tensions between the governments of the day and opposition groups are a vital part of any democracy. But now there is greater disenchantment with the political process itself; both the government and opposition parties and politicians of all hues have been losing credibility. They may partly derive from the increasing demand of electors and the growing inability of the politicians to deliver results as in an increasingly interdependent world, individual states are constrained in what they can achieve. There are also deeper causes such as corruption and criminalization of politics. Two minutes in a voting booth every few years does not satisfy their desire for participation. The widening signs of alienation from the political process call for the reform of governance within the societies for new forms of participation.

The huge global market today dwarfs even the economies of some of the smaller developing countries. All the emerging voices and institutions are actively involved in advancing various political, economic, social, cultural and environmental objectives; some of the objectives are mutually compatible while others are not. Many are driven by positive concerns for humanity and the space it inhabits but some are negative, self-serving or destructive. Nation-States must adjust to the appearance of all these forces and take advantage of their capabilities. Economic development of a country in the new millennium is dependent on its ability to positively harness its resources through sustainable means of good governance.

What is governance?

Governance is the sum of many ways, individuals and institutions, public and private, manage their common affairs. It is a continuing process through which conflicting or diverse interests may be accommodated and cooperative actions may be taken. It includes formal institutions and regimes to enforce compliance as well as informal arrangements. The key features of good governance are accountability, transparency, efficiency and a positive enabling legal framework.

There is no single model or form of governance. It is a broad dynamic complex process of interactive decision making that is constantly evolving and responding to changing circumstances. The World Nank's comprehensive study of the development of Sub-Saharan Africa in 1989 concluded that poor governance was the main reason behind the dismal economic performance of Africa.

The context of Nepal:

Before we proceed further let us look at our economic scenario. The growth rate of GDP of Nepal during the ninth-five year plan has been targeted at 6% with a growth rate of 4% in the agriculture sector and 7.3% in the non-agriculture sector. However, for the first two years of the plan period, the growth has been 3.1% in the GDP, 1.7% in the agriculture sector and 4% in the non-agriculture sector. As against a targeted ratio of 17% on gross savings, the actual growth rate is only 10.6% and as against a targeted 25% in gross investment, the actual growth rate is only 17.3%.

The above figures do not convince any body in the international market for attracting investment. This situation can be corrected only by adherence to specific reforms and relentless pursuit of good governance.

A lot of topics can be covered under "Governance"' but we will look at only a few major ones.

Corporate Governance

One key element in improving economic efficiency is corporate governance, which involves a set of relationships between the company's management, its board, its shareholders and other stakeholders. The degree to which corporations observe basic principles of good governance is an increasingly important factor for investment decisions. Of particular relevance is the relation between corporate governance practices and the increasing international character of investment.

If companies are to reap the full benefits of the global capital market and if they are to attract long-term capital, corporate governance arrangements must be creditable and well understood across borders. Even if corporations do not rely primarily on foreign sources of capital, adherence to good corporate governance practices will help improve the confidence of domestic investors, may reduce cost of capital and ultimately induce more stable sources of financing.

Controlling shareholders can significantly influence corporate behavior as owners of equity and institutional investors are increasingly demanding a voice in corporate governance. Individual share holders are highly concerned about obtaining fair treatment from controlling shareholders and management. Creditors have the potential to serve as external monitors over corporate performance. Employees and other stake holders play an important role in contributing to the long-term success of the corporation while governments establish the overall institutional and legal framework.

Financial sector reforms

The financial sector reforms should be the engine for the growth of the economy.

The development of the financial sector and capital market is necessary to provide sustainable support to the economic growth of the country.

The core principles for effective banking supervision require that

Credit decisions of the banks are made on an arms length basis free from inappropriate premise from outside parties.

Mandatory disclosure is made of NPAs and defaults.

These can act as warning bells for further exposure and protect the system from undue interference.

The capital markets should be made more vibrant by better disclosures and adherence to improved acccounting standards. Non financial disclosures also will encourage the foreign investor to look at Nepal favorably.

Attracting foreign investment:

Governance in the form of single window clearances for investments will be a catalyst. Currently, the concept exists only paper. It has not transcended the myriad bureaucratic hurdles and maze. Investors are exasperated at the end of the process and favorable climate in other countries compete with Nepal to garner the investment.

Public sector management

More efficiency could be realized by privatizing industries in roads, power, telecom, and capital intensive industries like sugar, cement etc. The government can focus on the more relevant issues like education, health, and national security. The privatization should commence from profitable industries, as no one will be interested in loss-making concerns. There should be complete transparency in this area and deeds should match the words.

Good governance in this area will ensure not only a good price for the industry but also the continuity of the privatized industry. Any privatization for other extraneous considerations will be a lose-lose option for both the government and industry.

Reasonable safeguards can he retained for the avoidance of asset stripping and short-term profit maximization.

Role of media in governance:

The media, especially the print media where private sector also operates, has a strong influence on the formation of public opinion. Initial days of economic reforms are tough times for any country. There are conflicting demands on the socio-political system, which require courage, compassion and clarity. The media should maintain a sense of balance and provide coverage of the issues in the larger perspective of maintaining the long-term vitality of a nation.

If the media dies nor act responsibly, transparency suffers as people will be less inclined to bring out the complete picture. The press council has a big role to play in ensuring good governance.

Role of NGO's:

NGO's add a considerable amount of strength to government. However, there is always the lurking suspicion that more resources are drained off a country than the benefits derived by the country. While we seek total transparency and accountability from the government, the NGO's should also be subjected to similar demands for bettering their contribution to the country.

The future:

The collective power of the people to shape the future is greater now than ever before and the need to exercise it is more compelling. Mobilizing the power to make life in the twenty-first century more democratic, more secure and more sustainable is the foremost challenge of this generation. We need a vision that can galvanize people everywhere to achieve higher levels of cooperation in areas of common concern and shared destiny.

It is to note that we need no new laws or rules but we urgently require the vision to think beyond oneself and for the nation and its people, and the will to implement new systems and practices. An attitude and a change of mindset are called for. A country, which adapts itself fast to the changing competitive scenario, will find itself in the leading pack and laggards will have no place in the coming fiercely competitive world. ( The author is the President and Managing Director of Surya Tobacco Company (P) Ltd and Vice President of Corporate Governance Group under FNCCI-Chief Editor).

THE <<CHARLES DE GAULLE>>, READY FOR SERVICE

Dominique GARRAUD

The French navy's brand new nuclear-powered aircraft-carrier will come to service at the end of 2000 in a strategic context which fosters naval-air operations. There is already talk of a <<brother>> for the <<Charles de Gaulle>>.

In the mid-January, the <<Foch>> aircraft-carrier left its base-port of Toulon for its prestigious mission around the world. After 6 years of service, the main element of French naval-air power was getting ready to give up its place to the new pride of the French navy, the <<Charles de Gaulle>>, ready for active service after tests at sea.

Since the first sheet of metal was cut for building the aircraft-carrier at the shipyard, in 1987, the <<Charles de Gaulle>> has required investments of 20 billion francs (without its on-board fleet), to provide the French navy with its first nuclear-powered surface vessel, a veritable mobile air base able to carry out all kinds of operational missions: protection, prevention, dissuasion and projection. This 40,000 tone of vessel, benefiting from the latest technological innovations for stealth and weapon systems, can carry 40 aircraft. Its 12,000 meter long flight deck, double size of the one on the <<Foch>>, is fitted with catapults enabling the lastest Dassault-Industries aircraft, the sea Rafale fighter-jet which is to replace the Super-Etendards and the Crusader, to take off at 300 km/h.

To prepare missions and to ensure the protection of this floating city and its 2,000 inhabitants, the French navy has also acquired two American Hawkeye look-out aircraft which are the navy equivalents of the Awacs. Two nuclear power houses provide 80,000 h.p. make it possible to attain a speed of 27 knots without any limit of duration's with a travel capacity of 1,000kilometers a day. The steam that they produce is also used to fuel an electricity plant producing 16 megawatts, i.e. that of a town of 20,000 inhabitants.

In the new strategic landscape in which the navy and particularly submarines are considered as the central elements of the French nuclear deterrent, the <<Charles de Gaulle>> is to be a vector of <<power projection>> in time. After seeing their use called into question during the <<cold war>>, aircraft-carriers are undeniably coming back into fashion. Recent conflicts such as the Gulf War, but, especially, international so-called <<peace-maintenance> or <<peace restoration>> operations, like those carried out in Kosovo, have demonstrated the usefulness of these floating airbase.

The 2000 edition of <<Combat Fleets>>, the <<bible>> of world navies, remind us that the United States still plans to have twelve aircraft-carriers in service in 2010 while countries such as Great Britain and Spain but also India , Thailand, South Korea and Malaysia intend to strengthen their naval-air capacities.

This return of the aircraft- carriers fuels discussions, in France, on the need to give it a brother. With the departure of the <<Clemenceau>> and then the <<Foch>>, the <<Charles de Gaulle>> is likely to be the sole aircraft-carrier in the French navy. As the <<Charles de Gaulle>> has to regularly undergo periods of maintenance, it will only be available in a discontinuous manner with the need to provide for a minimum of eight months of immobilization every four years. The present six-year military plan comes to an end in 2002, but studies already under way to calculate the costs of building an air-craft carrier and its logistic environment.

On leaving his position as head of the Navy, Admiral Jean-Charles Lefebvre set the new stakes on a European level by pointing out <<the importance of the maritime dimension >> for a continent whose seas border nine-tenths of frontiers and bring two thirds of supplies.