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Submitted by Chandan on
Neither SAP in Nepal in 1985 was “home grown” nor the austerity in all the sectors (where it was applied) warranted, at least when we look at its outcome from today’s lens. The change in economic paradigm was necessitated by the BoP crisis and the liberalization path of Nepal was pretty much in line with India’s liberalization drive because of the pegged exchange rate and high dependence on the Indian market for pretty much everything used by households and firms (it still hasn’t changed; in fact, market concentration is increasing). There were resistances to such reforms from extractive economic institutions, both private and public sectors, which were abetted by the extractive political institutions. Even though the liberalization tide swept pretty much all sectors, resulting in increased competition in the market, it did not have strong impact on sustaining competitive behavior for lack of effective supervisory institutions. For instance, the point raised by Mr. Devarajan about syndicates distorting markets in Africa applies to Nepal as well. Initially, the competition in transport sector benefited consumers in terms of better service and lower fare. But, influential investors started accumulating market power via acquisition and forced merger. Now, in the absence of a strong regulatory body to check accumulation of monopoly power by few investors, syndicates have emerged again. Fares have gone up, but services have done down. The syndicates are one of the reasons (others include poor infrastructure, lack of R&D, load-shedding, rents) why trading costs are so high in Nepal. Middlemen in the agriculture sector still distort market prices and supply, resulting in the disconnect between farms and wholesale/retail markets. Creative destruction and creative creation in the market never applied in its true sense. Instead, liberalization in the face of extractive political and economic institutions led to creative accumulation of market power. What Mr. Devarajan outlines for Africa is relevant to other countries in South Asia not mentioned by Ms. Kochhar. Given the sheer volume of remittance inflows to South Asia each year, it would be interesting to see a discussion about its role in aiding to macroeconoimc stability and poverty reduction. Remittances are an important part of Development 3.0 in South Asia.