The Mystery of Economic Development- Nepal & the World

Prof Heuser’s International Organizations and Economic Development class was the most engaging class I ever had at Vanderbilt. The combination of students who were smart yet open-minded and the Professor whose brilliance and enthusiasm were exceptional made it the best on any measure. We did our first group work on Hernando Desoto’s “The Mystery of Capitalism: why it works in the West and not Elsewhere.” His arguments were compelling: provide property rights to poor who already occupy the land and that will lead to economic growth. To Desoto, property entitlements will enable them to use their land as collateral for business investments.  In his eyes, this is what West did to their squatters in 18^th and 19^th centuries which helped flourish capitalism. The rest failed to do so and hence capitalism never bore its fruit there. To me, his approach was more like a Silver Bullet recipe for economic development; though the issue he raised is important to achieve economic growth, it was silent on several other variables that bring growth and prosperity in a country. There I was, actively engaged in the classroom discussion with many questions unanswered: does a universal solution exist against poverty? If providing property rights would solve poverty, why Nepal is still poor in spite of strong property rights?

      As compelling his theses were, I was tempted to find the disconnect between his claims and the real world I had experienced. The empirical evidence was somewhat different than his claims. Countries prosperity or poverty is not an outcome of a single variable. This reminded me one of my childhood conversations with my elder sister. I was at my first grade and she said to me that Nepal was poor because we were a landlocked country. Looking back, I think, my sister was half-right. It is quite true that many of the least developed countries of Asia and Africa including Nepal is landlocked, but, being landlocked is not the whole story why those nations are poor. In fact, the opposite of it is also true. Some countries, despite being landlocked, have performed really well in terms of economic development in the last 50 years. Botswana is the best example; it is a landlocked African nation, was poor until 1960’s and endowed with natural resources as many of its landlocked peers. With the best use of its resources (primarily diamond), instituting good political-social institutions and better management of foreign direct investment (FDI), it managed to achieve an unprecedented level of economic growth. In less than 60 years, it has become a middle-income country with a staggering GDP per capita more than $14,000 when many of its peers are still hovering below $1,000.

Botswana’s story can lead to an argument for natural resources endowment for economic development yet the evidence is not complete. South Korea, which had the similar income level in 1950’s (below $500 per person) as India, managed to become a first world economy in half a century despite its limited natural resources endowment. We could perhaps say that South Korea and India are not comparable because they differ in terms of culture, size of population and the forms of governments they had. Yet, South Korea’s example shows that economic growth is possible despite limited resource endowment. In the meantime, when we look in Africa, it experienced resource curse. The same endowment of resources which could have brought prosperity in Africa became the causes of endless ethnic violence and civil wars. Rampant corruption and political instability deteriorated the economic and social health of Africa leading to stagnation of economic growth in the entire region. Nigeria even broke the history of becoming one of the few countries in the last 50 years whose income level was lower in 2000 than in 1960’s.

Similarly, the case for Democracy as an imperative for economic growth also doesn’t hold much water though I believe that there is no alternative for democracy and freedom. Both South Korea and Singapore had autocracy during the most part of their economic success history. And, we have of course China as the classic example for this argument that has proven capitalism, free markets and international trade are all possible even under the command and control economy. India’s story until late 80’s when it had the dismal Hindu rate of growth also shows that having democracy and democratic institutions in place were simply not enough ingredients for economic growth.

  
The process of Economic Development seems to be somewhat mysterious. There is no single growth prescription that a country can adopt that will lead magically to prosperity. In the first place, developing countries should build their own model of economic development that is endogenous. If they were to adopt policies that seem to be working elsewhere, they should critically assess them and determine what works the best in their domestic soil.

Going with the flows and blind adoption of external policies, can have counterproductive impacts in the economy and poor might get worse off than before. However, there are several things that are universally accepted as fundamentals of economic growth; investment in education, health, infrastructure and strong political and social institutions. We sure can’t oppress people’s voices in the name of achieving unhindered economic growth. The process should be transparent and we have to be attentive to the externalities such as environmental degradation that comes with the process. With all the advancements in technology and the lessons learned from the past, I believe, a balanced economic growth is feasible and should be made inevitable to the developing parts of the world.