Technology and Institutions in the Process of Economic Reform: Achieving Growth with Poverty Reduction in South Asia

By Adams, John; Brunner, Hans-Peter | Journal of Economic Issues, June 2003 | Go to article overview

Technology and Institutions in the Process of Economic Reform: Achieving Growth with Poverty Reduction in South Asia


Adams, John, Brunner, Hans-Peter, Journal of Economic Issues


The prime premise in Clarence Ayres' Theory of Economic Progress (1962) is that the pace of advance in a society is driven by cumulative technological evolution. Technology is not tools alone but encompasses irreducibly the human skills and ideas necessary to make and use tools for instrumental purposes. Technological progress depends on the flexibility of the counterpart institutional setting. The degree of institutional resistance or opposition inheres in five ceremonial features: social stratification; a system of conventions, or mores; the potency of magical beliefs or ideology; the emotional conditioning of socialization; and the mystical rites and ceremonies that codify and intensify the institutional patterns of behavior (viii). In his most celebrated phrase, Ayres wrote, "Thus what happens to any society is determined jointly by the forward urging of its technology and the backward pressure of its ceremonial system" (ix). Surprisingly, his challenging thesis has rarely been applied as an overarching f ramework to guide practical development policy work in sectors at the country level.

This field report sketches Nepal's economic conditions, explains the motivation for forwarding information technologies in the context of financial sector reforms, and identifies the founts of institutional resistance to their adoption. To date, these institutional obstructions have remained sufficiently powerful to slow to a crawl the pace of technological innovation in Nepal's financial sector.

Nepal's Economy

Nepal's peoples are among the poorest in the world, enjoying a per capita income of $246 in 2002 (HMGN 2002, 13). The traits associated with a very low average income are amply represented. About 90 percent of the population is dependent upon subsistence agriculture, the annual output of which is predicated on the incertitude of the monsoon. In the poorest regions, up to 70 percent of all families live below the poverty line. Population growth of 2.3 percent per year contributes to the intransigence of poverty, causes regional food shortages, and prompts migration into the urbanizing Kathmandu Valley. The country's difficult terrain and weak public administration combine to impede the delivery of government services in the hills and mountains. Extremely high transport costs thwart merchandise movements and limit the extent of the market. A Maoist insurgency is active in sixty of the country's seventy-five districts. Persistent attacks have damaged the already thin rural infrastructure, destroyed schools and g overnment buildings, and inflicted more than 5,000 casualties in the past four years (IMP 2002, 6).

Despite these challenges, Nepal's economy grew at annual rates in the range of 4 to 6 percent during the 1990s. From 2001 to the present, the economy has stalled. Exports have been negatively affected by adverse global economic conditions. Manufacturing has slumped. Tourist revenues have dropped sharply. During the 199 1-2001 period of moderate growth, the service sectors played a leading propulsive role. Three subsectors--trade, restaurants, and hotels; transport, communications, and storage; and finance and real estate--grew at annual rates in the range of 5 to 8 percent (Adams 2001, 10). Despite grave balance sheet weaknesses, management deficiencies, and an immature regulatory environment, Nepal's financial sector contributed noticeably to the country's commercial and service expansion. Between 1995 and 2001, financial deepening occurred at an appreciable rate. As ratios to nominal GDP, savings deposits rose from 10 to 19 percent, fixed deposits from 11 to 16 percent, and demand deposits from 4 to more th an 5 percent (5).

In this setting, the government and the international development agencies seized upon financial sector reform as a potentially high-payoff area for institutional reform and modernization. Following the lessons of the Asian crisis, corporate governance, accounting standards, and the regulatory regime were to be strengthened in tandem with the financial sector reforms, most of which were directed at eliminating direct government ownership and management of commercial banks and other financial institutions. …

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