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.
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.