The openness of a society, its willingness to permit creative destruction, and the rule of law appear to be decisive for economic development.
– Kenneth J. Arrow, Nobel laureate in economics.

In the 1st part we talked about how Nepal keeps failing and why is it poor. Please read it, if you haven’t.
So If we want to understand how Nepal can prosper, first we have to answer this question first.

What is the link between politics and prosperity?

Economic institutions shape economic incentives: the incentives to become educated, to save and invest, to innovate and adopt new technologies, and so on. But it is the political process that determines what economic institutions people live under, thus it is the political institutions that decide how this process works.

Central is the link between inclusive economic-political institutions and prosperity. Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few and that fail to protect property rights or offer incentives for economic activity.”

Inclusive economic institutions in turn are forged on foundations laid by inclusive political institutions which make power broadly distributed in society and constrain its arbitrary exercise.

Inclusive political and Inclusive economic institutions = Prosperity in Nepal

How to build inclusive institutions in Nepal ?

To be inclusive in Nepal, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must let the entry of new businesses and allow people to choose their careers.

Inclusive economic institutions are in turn supported by and support inclusive political institutions that is those that distribute political power widely in a pluralistic way and are able to meet some amount of political centralization to set up law and order, the foundations of secure property rights, and an inclusive market economy. Similarly extractive*** economic institutions are linked in synergy to extractive political institutions which concentrated power in the hands of a few, who will then have incentives to support and develop extractive economic institutions for their benefit and use the resources they get to cement their hold on political power.

*** Institutions, which have opposite properties to those we call inclusive are called extractive institutions— extractive because such institutions are designed to extract incomes, wealth and power from one subset of society (mass) to help a different subset (elite).”

What are critical junctures and how they affect in positive or negative ways?

Critical junctures are catalysts for change either into inclusive or extractive political/economic institutions and decide whether the nation heads towards prosperity or poverty. In Nepal, Jana Andolan of 2006 was one such critical junctures. But it has led to more extractive political /economic institutions in Nepal. Right now in 2012 the failure of constitution to be built leading to a constitutional limbo is what can be called critical juncture. This can be a catalyst for Nepal being either prosperous by building inclusive institutions or a failed nation if it chooses to build more extractive institutions.

Can radical innovation like the internet bring about positive change in Nepal ?

Major innovations like the information technology also threaten to reshape political power. The ruling elite believe that they would become political losers because they are concerned, those displaced or rejuvenated by this invention (like the internet making large parts of bureaucracy redundant, and bringing educated youths from diverse backgrounds into the political game) would create political instability and threaten their own power.

The elite especially when their political power is threatened, form a more formidable barrier to innovation. The fact that they have much to lose from creative destruction means not only that they will not be the ones introducing new innovations but also they will often resist and try to stop those innovations. Thus society needs newcomers to introduce radical innovations, and these newcomers and the creative destruction they wreak must often overcome several sources of resistance, including that from powerful rulers and elites.

So what needs to be done to take Nepal on the road to prosperity ?

When a broad segment of society mobilizes and organizes to effect political change, and does so not for sectarian reasons or to take control of extractive institutions but to transform extractive institutions into more inclusive ones, then only it will translate into meaningful change. Whether such a process will get underway in Nepal and open the door to further empowerment and ultimately to durable political reform will depend on the type of economic and political institutions we make, on how we overcome the opposition to the creative destruction that happens time and again,  and on the critical junctures (events) like we are faced now in 2012 with the current constitutional limbo.

What rules Nepali society ends up with is determined by politics, and the answer to the question of whether our beloved country will fail or prosper.

In other words to make Nepal prosperous, we have to build inclusive political and economic institutions NOW !

This summary of this article is made possible through heavily borrowing and edits based on quotes from the book “Why Nations Fail” by Daron Acemoglu and James A. Robinson. The authors hold copyright to a lot of content in this article, therefore I cannot claim any right to this article. If  you consider this stealing, I apologize in advance. I only do this because their words seem to do justice than mine. If you are copying content from here, please attribute the article to the names mentioned above properly.