Nepal has witnessed a series of events and developments aimed at establishing inclusive state institutions and a just society throughout history. The 1951 Movement was a watershed moment for the country’s political awakening and democratic movements, resulting in the abolishment of the Rana rule and the institutionalised hereditary prime ministerial system. However, fast forward to 2023, a lack of confidence in establishing new reform institutions in the country persists.

State institutions have a fundamental role in shaping the government’s ability to legislate and execute policies. They can influence the strategies adopted by political and economic actors, informing them of opportunities and constraints. Ideally, it is within institutions’ purview that define power distribution, ultimately influencing who these actors are and how they conceive their interests.

Institutions are significant not only for executing government policies but also the objectives they seek to achieve in a broader political landscape. However, the structure and operation of institutions are also contingent upon the circumstances in which they exist. Political institutions are crucial because they structure the power held within the economy, military, administration and control or regulation of mass media. In popular discourse, Nepali intelligentsia primarily focus on achieving economic development and a just political culture but often overlook the role of institutions. Investment in institutional capital holds great importance for achieving economic development.

Extractive institutions

In their book Why Nations Fail, economists Daron Acemoglu and James Robinson argue that a country’s political institutions, rather than its cultural DNA or natural resources, are the primary factors determining its wealth. Unfortunately, Nepali society is still impeded by a feckless and dishonest political class focused on retaining power or simply enriching themselves. A country can achieve a lot by utilising its demographic dividend. By extension, the country reflects impoverished syndrome, which highlights an inability to adequately support its population yet possess sufficient wealth to fuel power struggles among the political elites.

Extractive institutions exploit and hoard vast natural and economic resources for their benefit. At best, they can be called vampire capitalists. By bringing together a kleptocratic political regime and self-serving elites and institutions and placing them within decentralised units, sustained poverty growth, conflict and outright failure are shaped.

So far, federal Nepal appears to represent a state system with weak institutional foundations and a decentralised structure burdened by predatory political elite and exhaustive economic establishments. Nepal lacks the strength to provide essential services but retains just enough power to maintain the dominance of political elites and their cronies. The policy perspective revolves around whether any institution can be simply inserted into specific circumstances and anticipated to perform as observed elsewhere. Alternatively, these institutions should be thoughtfully adapted to local conditions, ensuring their continued role in shaping the political landscape.

Several policy errors appear to be designed and backed by a political culture in Nepal that hinders and obstructs economic development. Institutional fragility encompasses a lack of effectiveness within the bureaucracy, as well as incompetent political governance, resulting in poor bureaucratic and political institutions. Moreover, the attitude and behaviour of bureaucrats and politicians can be attributed to institutional weakness. Therefore, accepting only conventional social science explanations for the enduring presence of poverty due to unfavourable geographical circumstances, limiting cultural norms, or uninformed leadership and technocrats is not reasonable.

We have two choices: Either we opt for the path of institutional drift—fostering political and economic institutions that prioritise inclusivity, with a focus on power-sharing, productivity, technological advancement, education and the overall welfare of the country–or we keep maintaining our extractive institutions that are bent on seizing resources and wealth from the state endowment.

Embedded challenges

Nepal has seen recurring corruption scandals—the organised embezzlement of public funds by politicians, civil servants and private contractors, among others. Corruption eradication attempts are often ineffective as the current institutional environment creates significant obstacles to implementing changes.

Regarding funds an electoral candidate spends in their election campaign, there are no reliable institutional checks to verify whether a candidate has exceeded the spending limits. There are scenarios whereby affluent individuals can buy elections—reflecting a likelihood that Nepali republicanism tends to benefit the wealthy. Moreover, political parties aren’t required to disclose the origins of their financial support. A lack of transparency encourages corruption and allows for the misuse of public resources.

Inefficacy and a lack of motivation among the political class and bureaucracy can directly result in institutional fragility. It also exposes political shortcomings where the politicians have not granted autonomy to the bureaucracy or have manipulated situations for their political and electoral advantages. Even if a bureaucracy is highly competent, in some instances, politically embedded challenges can be the foundation for an institutional breakdown, leading to detrimental and even irreversible consequences. Considering everything, such issues are frequently seen as a consequence of political pathologies rather than bureaucratic ones.

State institutions & FDI

Nepal hasn’t been able to effectively harness its resources for development despite having abundant natural resources and boasting a demographic dividend. Nepal is one of Asia’s most impoverished countries with unfavourable economic, social and political indicators. While discussions about attracting foreign direct investment (FDI) in the country are ongoing, gaining the trust of foreign investors remains a challenge because of the lack of trust from Nepali investors. Investors hesitate to invest in a country where corruption, nepotism and bureaucratic hurdles exist as these raise the expenses associated with conducting business.

The effectiveness and efficiency of state institutions determine the country’s corruption magnitude, administrative competency, rule of law, regulatory quality and voice and accountability for FDI inflows. The host countries’ institutional quality directly influences their profitability, as countries with robust institutions attract foreign investors by offering attractive returns on investment.

Primary determinant

Nepal has witnessed abundant political trials and experiments in a short time. Nepali politicians are still engaged in extravagant political exploration, which reflects the country’s uncertainties regarding its ultimate stable institutional framework. Institutions are the primary determinant of a country’s economic development. Factors like resource constraints, geographical location, economic policies, geopolitical considerations, and internal social structure such as gender roles and ethnic disparities have minimal roles in a country’s economic development compared to institutions.

A depressing cycle exists in which one ruling elite frequently replaces another. The equation is straightforward: Strong and inclusive institutions lead to prosperity, progress and enduring development. Conversely, weak and extractive institutions result in poverty, deprivation and stagnation over several decades. How can we cultivate institutions that stand the test of time? It can be accomplished by promptly executing the kernel of inclusive economic and political institutions with unwavering integrity. Most crucially, we must nurture and encourage counterbalancing forces such as active civil society organisations, research think tanks, activists and contemporary versions of trade unions that maintain distance from their association with political parties.