David and Goliath

Posted by: on Aug 20, 2006 | One Comment

What is common to Estonia and China? Estonia is in Europe, China is in Asia. Estonia is just a dot on the map, in China you could fit 212 Estonias. Estonia’s population of 1.5 million is 6.5% of Nepal’s. China has 1.3 billion people, 56 times that of Nepal. Estonia is a democracy, China is ruled by one party. You know China, but are unlikely to have heard of Estonia.

However, something ties these disparate countries together. Both have witnessed incredible improvement in the quality of life of its people during the last decade. Both have gone on the path of economic freedom and their citizens have reaped a huge dividend.

These two countries have forever exploded the myth that you need to be either small to develop as many say, or you have to be big as a few maintain. They prove conclusively that size does not matter. Economic freedom is what matters.

Whenever I talked of Singapore’s or Hongkong’s development, people say, “they are tiny, don’t compare them with us”. Now, when I talk of China, they have no answer.

China shed its ideology three decades ago. While it remained politically closed, with the communist party maintaining a tight control, people were given freedom to buy and sell, foreign investors were welcomed and private property allowed.

The results are apparent to anyone who has visited Shanghai, Beijing or many of the other towns and cities. It is joked that the national bird of China is a ‘crane’; you see so many of them around. 40% of world’s cranes, at one time, were in China; such was the construction activity.

While India stagnated under the weight of its socialist government’s regulations, China torpedoed ahead. For a country of China’s size to grow by 8-10% a year was considered impossible, and yet China achieved this feat not for one or two years but for the most part of the last 30 years. China’s per capita income which, at one time, matched that of India is now twice as much.

This happened with only partial economic freedom. China continues to be hampered by huge and inefficient government undertakings whose accounts remain a mystery. What would happen were these to be privatized and China’s economy was to become as free as that of Hongkong is anyone’s guess? Would it grow by 15% annually or 20%?

India now chases China, with a me too philosophy, and has with liberalization more than doubled its growth rates to 6-7% from its earlier 2-3%. If only India had adopted sensible policies immediately after independence the story would have been different.

You might have seen an Indian company dominating the world’s car markets instead of Toyota. It may well have been a Mumbai based MNC providing the world with a news channel instead of CNN.

In 1991 the Soviet Union, called the Evil Empire by the US President Ronald Reagan, ceased to exist and Estonia achieved independence after 50 years of Soviet occupation. Unlike the other newly created nations, carved out of the erstwhile Soviet Russia, Estonia went in for a big-bang liberalization. It rejected advice from those who advocated a gradual approach.

Mart Laar, Estonia’s former PM, told me that it followed the example of West Germany after World War II. Price controls were abolished, currency allowed to float freely, taxes cut, public enterprises (PE’s) sold and foreign investment was welcomed.

The three largest banks in Estonia which control 90% of its banking assets are 100% foreign owned. Rules are there to facilitate foreign and domestic investors, not to hamper them.

The results of sale of PEs, abolition of the corporate tax on profits reinvested in the domestic economy, elimination of custom duties on most imports and a general pro-business environment were spectacular. The economy took off and its people look forward to the day when they will enjoy Western Europe’s standard of living.

Nepal too can achieve similar success. Its people are as intelligent and not any less industrious. Being too small or having too many people is not a reason to be poor. Take off the economic shackles and the people of this country can do what the Chinese and Estonians are doing.

The Himalyan Times

1 Comment

  1. Ottoniel
    February 13, 2012

    Khanal:Are you on some Himalayan hash or sehmtoing? Wake up & smell the coffee man You are living in a la la land.Political stability is the key to development or economic activity. We have none. There is capital flight due to militant trade unions. What the hell are you talking about. Get off you high horse!


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