Continued availability of external assistance helps maintain status quo of 'incompetence and corruption in governance'

-Ajay Ghimire, Ace Finance Company, Kathmandu

He is a highly qualified young Nepali entrepreneur. He is full of vigor and amicable as would be evident from his working styles and managerial capabilities. At the moment he is associated with the Kantipath based "Ace Finance Company Limited". In effect he is one of the founding fathers of this new financial Company and concurrently is the Chief Executive Officer there since February 1995. Ace finance company believes, I was told, in accomplishing the unbelievable in this sector. The Company has attained new heights within a very short span of its establiahment. Besides this, he is also the founding director and the CEO of the Ace Institute of Management, Kathmandu. Apart from these, for example, he held various positions from 1984 to 1995 at the Nepal Arab Bank Limited, Kathmandu.

Monsieur Ajay Ghimire originally hails from the Terai plains. However, he secured the degree in Masters of Science in Management discipline from the MIT Sloan School, Cambridge, USA in the year 1994. Prior to this, Mr. Ghimire obtained Master of Science in Mathematics from Punjab University, India as back as in October 1984.

His short term Professional Associations include, among others, three weeks consulting assignment with the appraisal mission from SDC, Switzerland (Sept-Oct 2000); one month consulting assignment as one of the members of the Education Sector Review Team at the World Bank (Nov.99-Jan 2000) and Research Assistant to Prof. Maureen Scully on "Implementation of Business Ethics on Large US Corporations" at the MIT Sloan School, Massachusetts, USA. Finally, Mr. Ghimire also had an opportunity to attend a Summer Intern analyzing fixed income funds from June-August 1993 in Boston, USA.

Ajay Ghimire is a voracious reader and prefers to share his knowledge through writing articles based on extensive research using new methodologies and techniques. For example, some of his research papers which have been already printed in several newspapers include, "Regulation and Financing of Education in Nepal: A Reform Proposal" prepared for the WB; "An Overview of Financial Services Market in Nepal" prepared for Nepal Rastra Bank; "Investment and Recovery: Problems and Prospects" prepared for a seminar jointly sponsored by the ADB and the SC Bar Association; "Regulating Financial Sector in Nepal: A New Perspective" prepared for Nepal Rastra Bank; "Inefficiency of Our Financial System in Resource Allocation"' ; "National Saving Bond Pricing: Will Nepal Rastra Bank Explain? and last but not the least "Inertia in Stock market: An Introspection" prepared for the Kathmandu University School of Management.

In addition to these, he has several small papers to his credit which time permitting we will print in our publication provided he honors to our request.

Last week, we approached this young and energetic executive officer right at his office for an exclusive tête-à-tête to which he agreed. Below the results: Chief editor.

TGQ1: The Nepalese economy, we are told, is in a very bad shape. Who is to be held culpable/responsible for this slide? Also appraise us as to how the sliding economy could be brought back to its shape so that the nation takes a sigh of relief?

Ajay: Is the Nepalese economy in a bad shape? Typical response to this question we hear from economists is yes and no. They say the GDP growth is expected to be around 6% (not so bad), inflation around 2% (very good), foreign exchange reserve has increased substantially (very good), and so on. However, as an ordinary citizen, I agree with what you have been told, " The economy is in a very bad shape." We have fallen way behind even India in GNP per capita. Growth in Per capita income is very low, especially for a country whose base per capita income is one of the lowest among all the nations in the world. Poverty situation in the country as indicated by development indices and naked eye observations of the people around, has not improved. Low inflation, contributed primarily by decline in the prices of agricultural commodities, has come at the cost of increased inequity in income distribution. Foreign exchange reserve has increased at the cost of external borrowing by the government. In fiscal year 1999/2000 the accumulated external loan was reported at around 55% of GDP and debt-servicing obligation was said to consume about 1/3rd of the regular expenditure. Almost 90% of the Government revenue, which has been hovering around 10% of GDP for last few years, is expected to be consumed by regular expenditure, leaving development expenditure at the mercy of external financing (aid or loan).

Who is responsible for the slide [failure in desired improvement] in Nepalese economy? I personally feel that we should concentrate our effort in trying to find out the root causes of the problem as opposed to wasting our energy in getting engaged in blaming game to satisfy our ego.

How can our economy be improved? One of my major concerns is rampant collusion of people’s representatives in the government and the already privileged section of the society in a spree of wealth transfer within the economy from the general coffer to that of the special interest groups. As such, my prescription in the economic front would be standard free market prescription: Withdrawal of Governments from the role of producing and delivering services as much as possible. People should limit the Government’s role in enabling and regulating the production and delivery by private providers. Since such governmental role requires a totally different skill and attitude from what our people in government are used to having, we need to really think and debate on how should we the people select and elect our key government servants.

TGQ2: Nepal is all set to enter into the WTO arrangement. Senior economists opine that there has been no home work on the part of the government prior to joining the World body. Enlighten our readers as to the benefits as well the otherwise for this country if we join this trade body?

Ajay: Proponents of WTO say that it is a rule-based system designed to facilitate free and fair international trade and therefore is in the interest of all trading nations. Opponents say that the rules are, in effect, made by powerful trading nations for the benefit of large multinational corporations whose deep-rooted interest is their profit. Trade Related Intellectual Property Rights, which is part of the WTO, favours the big multinationals at the cost of consumers in poor nations, at least in the short run. As a small country at the lower end of the development ladder, however, it is in Nepal’s interest, politically and economically, to obtain the full membership of WTO. Fair access to Nepalese goods in international market, guaranteed transit rights, and international dispute resolution mechanism should be taken as opportunities to increase our export. However, government should be geared to minimize the cost of adjustment. The adjustment cost would come in the form of decreased government revenue per dollar of import, and the need to reallocate resources from activities that were sustained because of the differential in import duties. I am not aware whether any study has been done to assess the impact and adjustment cost of WTO membership and whether the government has done any homework on the adjustment strategy.

TGQ3: Critics say that we have become totally dependent on foreign aid to the extent that we are now being dubbed as a donor-driven-beggar country. Is there any mechanism, in your mind albeit, which allows us to maintain our financial matters with no foreign aid at all or at least with less than what we have been begging today?

Ajay: The facts that about 65% of our development budget is financed by foreign grants and loan, and accumulated external loan is about 55% of our GDP do indicate that we are donor dependent. We might be dubbed as beggar as indicated by typical mentality of our bureaucrats that without the foreign aid we cannot carry on our development responsibility. However, what is really damaging to the country in this context is the lack of intelligence in our begging. Most of the aids are bundled with loans and come in the programs of donors’ choices. Consequently, the assistances normally do not match the priorities and need of Nepalese people but the Nepalese are burdened with the loan nevertheless. Secondly, the conditions attached with the loans, especially in relation to mandatory use of international technical expertise, ensure that substantial chunk of the external assistance flows out of the economy. Even if we assume – which I seriously doubt – that the Nepalese economy gets fair value for the international technical services it receives, multiplier effects would have been much more if domestic expertise, to the extent they were available, were used. Thirdly, unplanned random distribution of easy and artificially cheap money throughout the economy distorts the market, crushing local incentives and entrepreneurial spirit. I do not mean to say that foreign assistance -- loan or aid -- per se is bad. However, acceptance and administration of external assistance without careful analysis of its need and consequences could inflict serious damage in the economy despite good intent. Finally, I do not totally disagree with a school of thought that says continued availability of external assistance helps maintain status quo of incompetence and corruption in governance.

Availability of foreign assistance should be taken as an opportunity to expedite our development. The solution is either to make our government more responsible so that external assistance – aid or loan -- can be negotiated at better terms and channelised to best use or for people to put limitations -- through legislation -- on the government on the nature of aid and loan that the government can accept.

TGQ4: Acts of corruption and that too at the highest echelons of political sector and the bureaucracy has become the talk of the nation. Do you consider it as a Nepalese menace or think it to be a phenomenon common in the world more so in south Asia. How you take this matter and what impact it would have imparted on our national economic performance?

Ajay: I do not think corruption is a typical Nepalese phenomenon. Self-serving and helping both are natural human instincts. However, political, social, economic systems through their incentive and reward system influence how dominant those instincts are in any society. Before the advent of present multiparty system in Nepal, the fear from the king helped limit the corruption in a very limited circle, even after adjusting for more news dissemination in the present system. By and large Nepalese then were considered very honest and simple. Law enforcement agencies and the legal system, because of the gradual degeneration in their own ethical standard, have failed to replace the fear mechanism, which was in place prior to 1990. As supposed to be role models – members of parliament, ministers and bureaucrats in the government – got engaged in self-serving behaviour of amassing wealth by facilitating transfer of wealth from general public to certain interest groups, corruption percolated down to every level of society. What is worse is that the institutions of last redress, the legal courts, have not been immune from corruption either.

The real concern is not the corruption per se but the volume of corruption as a percentage of our GDP. I would probably not be wrong in presuming that such ratio of corruption to GDP would be very high for Nepal. The presumption is based on anecdotal hearing of various incidents of corruption during social interaction. The economy can sustain only so much corruption without it letting significantly distort the incentive and resource allocation. The level of corruption in our economy, I feel, has crossed that limit. The corruption, therefore, by distorting the incentive reduces the productivity of our resources plus it aggravates inequity through wealth transfers from the poor to the rich.

TGQ5: As an intellectual of the country, how you see the Nepalese politics that have been unfolding of late? The last session of the Parliament could not function for even a single minute. The Maoists are on the rampage. People now eye towards the constitutional monarch for obvious reasons. All put together a very bad name has been attributed to the system itself. In your opinion is it the system or its champions to be blamed? What could be a way out to get out of these malaise? Your comment please.

Ajay:I would appreciate if I were not categorized as an intellectual. I seem to have developed aversion to that word. However, let me attempt to respond to your question as an ordinary Nepali citizen, albeit one of the fortunate ones.

People tend to sanctify the system and refrain from rectifying the system by blaming the people. If people were to blame, how do we justify the system’s reelection and reappointment of the same people – who are openly known to have engaged in self-serving behaviour of massive proportion -- in the government election after election? How do we justify people widely known to be corrupt being promoted in highest echelons of bureaucracy round after round? How do we explain general conception of even judiciary being under influence of money and people’s total lack of trust on the judiciary and law enforcement agency? Therefore, we do need to very carefully look at the systems we have in place. Democracy -- what I understand of it as a government of the people, by the people for the people – does not yet exist in Nepal. Whatever may we have on the paper, we have not been able to shed our feudal mentality. Democracy is a long way off.

What could be the way out? Pre-requisite of the way out is an unconditional acceptance of the fact that we are in a terrible mess. Then I would recommend two-pronged approach. One is a serious study and open debate on what we can do to make our system truly people oriented, whatever name people may give it. The name Democracy will meet with least resistance and get wide international support. Simultaneously, incrementally improve the effectiveness of present system of multiparty democracy. Some of the immediate measures that come to my mind for incremental improvement are as follows:

1. Any political party that does not publish its audited books of account annually should be barred from fielding any candidate in election, local or national. This is expected to discipline the party leaders through the pressures from the party members.

2. Any political party that does not convene its election for office bearers as per its constitution submitted to Election Commission should be barred from fielding any candidate in election, local or national.

Whether we can achieve these small changes by empowering the election commission or we need to amend the constitution itself, I do not know. However, these small changes will go a long way in making the political parties more democratic, which I think is essential for multiparty democratic system of government to be effective.

One more incremental improvement that comes immediately to my mind is related to the judiciary. My understanding is that any critical review of the adjudication of any case is prohibited. I can understand the prohibition during the time the case is under consideration so as to avoid influence and pressure and to ensure free and fair justice. However, immunity from public scrutiny even after the verdict is awarded will only tend to make the judges tyrannical and possibly corrupt. As such the system should allow public scrutiny of judgment and judgment processes after the fact.

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